Why GDXJ is a Sucker’s Play

Why GDXJ is a Sucker’s Play

What better way to capitalize on this epic bull market in gold than to own the junior miners – a highly volatile call option – right?

If the past two years are any indication…maybe not.  While gold, even with the recent pullback, has had quite the move:

GOLD price chart

There’s been no mistaking the trend in gold over the past three years (Source: StockCharts.com)

The junior gold miners, in aggregate, have been quite lackluster:

GDXJ three year price chart

Meanwhile, GDXJ has meandered sideways (Source: StockCharts.com)

The reason?  A large percentage of GDXJ is pure crap – according to resource expert Rick Rule.  On the Financial Sense Newshour, Rule explained that he’s not hot on GDXJ as an investment vehicle because 90% of junior miners are not viable entities, in his opinion.  And if most of the industry is not viable, why would you want broad exposure to it?

Rule expressed greater excitement about the major gold miners, as he believes they’ve cleaned up their acts over the past few years, and are now exhibiting positive operational characteristics (as in, they have more cash at the end of each quarter than they had at the beginning!)

So while GDX and the majors have also underperformed gold, they have not been quite as egregious as GDXJ – and Rule believes they are poised for a potential run going forward.

GDX three year price chart

GDX – hey, at least it’s not as bad as GDXJ!

Further listening – Rick Rule: Why Gold Stocks Have Underperformed