Playing Global Uncertainty With Alternative Gold ETFs

by on December 3, 2009 | ETFs Mentioned:

In recent months, gold’s rise has been attributable primarily to continued weakness in the U.S. dollar, with the yellow metal rising as investors looked to move their reserve holdings from the greenback to hard currency. But over the last week, precious metals have been given another boost as general economic uncertainty sets in around the world.

When Dubai World reported last week that it would suspend debt payments for six months as it undergoes a restructuring of operations, investors scrambled to adjust asset allocation strategies, fearful that unexpected weakness from one of the world’s richest regions could signal a tough stretch ahead for the global economy. It is believed that UK banks collectively have nearly $5 billion of exposure to Dubai, although most of these loans are associated with parts of the company not included in the restructuring.

Since the announcement, investors have struggled to digest and interpret the developments out of Dubai, watching eagerly to see if oil-rich neighbors step in to assuage the situation. Opinions on the significance of Dubai’s troubles vary significantly: some see it as an isolated incident of a state borrowing beyond its means that has been blown out of proportion, while others view Dubai as the first domino to fall in what could be a very broad and very severe debt crisis in the emerging world.

ETF Plays On Gold

Many investors have begun adding moderate gold holdings as a form of “portfolio insurance.” If Dubai turns out to be the canary in the coal mine, setting off a wave of sovereign debt defaults, global equity markets could tumble, and those looking for a safe place to park their assets could snap up precious metals. The SPDR Gold Trust (GLD), which buys and stores gold bars in secure vaults, is by far the most popular and most direct ETF option for gaining exposure to gold prices. But it’s hardly the only way to do so (see the complete guide to gold ETFs for an exhaustive list of options).

Some investors have been hesitant to reduce their equity holdings significantly, fearful of missing out on a sustained market rally that has pushed most major benchmarks higher in recent months if Dubai does turn out to be just a small bump in the road. For those looking to partially hedge their bets while still taking part in any upside, metals and mining ETFs may present an interesting opportunity. There are a number of funds offering exposure to this sector, including:

  • Dow Jones Emerging Markets Metals & Mining Titans Index Fund (EMT): This ETF focuses on the largest publicly-traded mining companies involved in precious and industrial metals exploration, extraction, and production within the emerging world. As gold prices have risen in recent months, so too have the stocks of companies mining the metal, making mining ETFs a popular way to gain exposure to gold prices without reducing equity allocations. Since August, the correlation between EMT and GLD has been above 0.90. EMT has big weightings to Brazil and China.


  • Market Vectors Gold Miners ETF (GDX): This ETF is perhaps more of a pure-play on gold miners (whereas EMT includes industrials metals miners as well), investing in stocks of many of the world’s largest precious metals producers. GDX assets have swelled to more than $5 billion in recent months as investors have sought out a leveraged play on gold prices.


  • Market Vectors Junior Gold Miners ETF (GDXJ): Whereas GDX invests in large mining companies, such as Barrick, Goldcorp, and Newmont Mining, GDXJ invests in smaller gold miners with less developed operations and less stable cash flows. GDXJ was just launched in mid-November, and has returned more than 15% since its inception.


Disclosure: No positions at time of writing.