Categories: General Market Commentary / Precious Metals
Topics: General Market Commentary / General Precious Metals

Junior Gold Stock ETF Poised to Create “Fire Sale” Opportunity in Gold Stocks by Marin Katusa

Junior Gold Stock ETF Poised to Create “Fire Sale” Opportunity in Gold Stocks

In less than two months, a unique market event could give us the opportunity to buy high-quality junior gold stocks at massively discounted prices. Here’s how to prepare for what could be the last great gold stock buying opportunity we see for years.

By Marin Katusa

 

The creator of the wildly popular junior gold stock ETF has a 4 billion dollar problem.

Although the mainstream media is reporting on this big problem, it’s missing the story’s most important detail… one that could help you make large capital gains over the next 12 months.

I believe that very soon, a major issue with the junior gold stock ETF will create an opportunity to buy some of the world’s most valuable junior gold companies for pennies on the dollar… all thanks to a coming tsunami of selling that has nothing to do with the companies themselves.

And it’s all thanks to a developing story in the popular VanEck Junior Gold Miner ETF (symbol GDXJ).

I expect the opportunity around the corner will be so big that I’m getting millions of dollars of my own money ready to deploy. You could say I’m “amassing troops at the border.”

This situation is urgent. It’s going to arrive quickly and play out quickly.  And as I’ll explain, what’s coming in just a few short months may be the last great gold stock buying opportunity you get for a decade.

How ETFs Could Create a Big Gold Opportunity in Less than 2 Months

Over the past decade, ETFs have become one of the world’s most popular investment vehicles.

Investors love idea behind ETFs: Buy and sell broad baskets of stocks with “one click” ease. This area of the market now holds over $2.5 trillion worth of assets.

One particular ETF, the VanEck Junior Gold Miners ETF (GDXJ), is a big hit with gold stock investors.

It’s a one click way to buy a basket of small cap (aka “junior”) gold exploration, development, and production companies.
Investors reckoned that by holding GDXJ, they get “juice” on the upside, but not the downside risk associated with owning just one or two gold juniors.

The chart below shows the growth in market capitalization for GDXJ. From January 2010 to May 2017, the market capitalization of GDXJ grew by 480%. At one point, the fund amassed more than $5 billion in assets.
 

 
Believe or not, this tremendous growth is a problem for the ETF company…

GDXJ buys and sells companies according to changes in an underlying index created by VanEck called the MVIS Global Junior Gold Miners Index. The fund essentially mirrors the activity within the index fund, or at least it did until recently.

By definition, junior gold stocks don’t have large market caps and their shares don’t have tremendous trading liquidity.

GDXJ grew in popularity so much so that it had too much cash and not enough places to put it.

Many junior gold stocks are Canadian. As soon as an entity owns more than 20% of a Canadian-listed company ,regulations restrict its trading ability and make holding the position a general pain in the behind unless you are in it for the very long haul.

VanEck didn’t want to own 20% of any gold stock.

So, it restricted itself to ownership stakes in individual names to “just” 19.9%.

This is important because it essentially caps how much VanEck can invest into each gold company… and would eventually cause it to run out of stocks to buy.

No sane financial firm will willingly turn down cash to manage and collect fees on. So, instead of leaving the cash on the sidelines, Van Eck used the cash to invest in companies with larger market caps, known as the mid-tiers.

GDXJ was created to give investors exposure to juniors, but because so much capital flowed in, the “Gold Junior ETF” became more of a “Gold Mid-Tier” ETF.

The GDXJ most notably began to deviate away from the index in September 2016 when it began purchasing shares in the large mid-tiers (+$1 billion market cap), while its underlying benchmark index MVIS Global Junior Gold Miners Index did not.

The MVIS Global Junior Gold Miners Index is set to be reviewed and rebalanced on June 9th 2017.

Between now and then, I expect there to be significant volatility in all the sub $1 billion market cap junior and mid-tier gold companies. Companies’ shares will be sold by GDXJ so the new ETF can become a “large mid-tier to small major” gold ETF.

Once this is done, and the new positions are bought, the GDXJ will rebrand itself accordingly. Then, within 12-24 months, a new ETF for juniors to replace the demand of the old GDXJ will be created. This “reshuffling of the ETF deck” will create a great opportunity for informed gold stock speculators.

Understanding Company Selection for GDXJ

To qualify for inclusion into GDXJ going forward, companies must meet a new set of requirements. The goal of these new requirements is to “tilt” the fund away from very small companies and in the direction of mid-sized companies.

To qualify for GDXJ, companies must have a market cap of at least $150 million.

Also, a stock’s average trading volume each day must be at least $1 million per day over the course of the past 90 trading days.

Furthermore, to avoid any company having more pull than the others, the weighting of each company in the fund itself is capped at 8%.

The index will be reviewed every quarter to make sure the index is working properly.

This quarter’s rebalancing is so important because the index is allowing larger companies to be included.

By increasing the maximum size allowed into the index, mid-tier companies such as Yamana Gold, Pan American Silver and Eldorado Gold will be included in the index.

To free up cash to pay for these new investments, holdings in every other company within the index will need to be reduced.

Small gold companies that don’t have enough size or liquidity to be included in the new fund will be hit with massive amounts of selling. Again, the GDXJ fund owns more than 19% of some juniors.

When 19% of a small company’s “float” is sold, it can send its stock price down 20%... 30%... even 50% in a month. I know this might sound crazy, but it happens often in thinly-traded junior resource stocks.

Here’s why I believe this could create an epic gold buying opportunity (perhaps the last one we see for a decade).

The Chain Reaction I Love to See

The forced selling I expect to see in many junior gold stocks will force share prices much lower.

Add in the hedge funds that are short selling before the GDXJ starts selling its position, and this will create extra selling. This will create an incredible opportunity, but only after the selling pressure of the hedge fund short positions and the GDXJ subsides.

It also goes much deeper than just the index itself rebalancing. Other ETFs which benchmark against the MVIS Global Junior Gold Miners Index will also be forced to reposition themselves accordingly or change their fund mandate, including other funds hitting stop losses, and the selling will provide an ideal environment for alligator buying.

This forced selling will cause some gold stock investors to hit stop losses and dump shares… which will create more forced selling… which will cause more stop losses to be hit and more share dumping… which will create more forced selling… and so on…

Eventually an “avalanche” of selling will hit the market… and it will have absolutely nothing to do with the underlying values of the gold companies themselves.

The selling avalanche will strictly be a function of a market warped by robotic, unthinking computer programs.

This selling will exhaust itself in a final “last gasp” puke out… where the final few dozen desperate, ignorant sellers sell their shares with no regard to their intrinsic value…

And that will create an incredible stock market anomaly….

Where VALUE decouples from PRICE…

Where SMART operators buy assets from DUMB operators.

Where you can buy DOLLARS for 50 CENTS.

Those words should be music to your ears… because that is the kind of opportunity any investor worth his salt looks for in the market.

Again, what is coming our way is a self-reinforcing cycle of forced, ignorant selling that will feed on itself and cause a panic in some of the world’s best small cap gold stocks.

In a matter of days, the share prices of high quality junior gold stocks could plummet 25% - 50%... leaving them absurdly undervalued… and opening awesome windows of opportunity.

I doubt these windows of opportunity will stay open more than a month in individual stocks. Some windows will be open for just a few days. That’s because at the bottom, a small group of very well-funded, very well informed investors will be there waiting… ready to scoop heaps of bargain gold shares into their baskets.

And when normalcy returns to this panicked market, artificially depressed shares could easily rally 50% - 100% in a matter of weeks. It will be a true windfall for smart operators. History shows us what is possible here.

Regards,
Marin

P.S. In Monday’s follow up essay, I’ll show you what kind of returns history says are possible when value decouples from price. They can be extraordinary. I’ll also share more key details on how to take advantage of the coming GDXJ-related fire sale in junior gold stocks. Stay tuned.

To learn more about Katusa Research please click link https://katusaresearch.com