Global X, one of the fastest-growing U.S. ETF issuers, announced today the latest addition to its product lineup. The company rolled out the Gold Explorers ETF (GLDX), the first pure play fund offering exposure to gold exploration companies. The new fund will offer exposure to this unique segment of the gold mining life cycle by tracking the Solactive Global Gold Explorers Index, a benchmark that measures the performance of companies engaged in exploration for precious metals. The index underlying GLDX consists of about 30 different securities, with a heavy tilt towards Canadian (70%) and U.S. (18%) securities. It should be noted, however, that many of the component companies maintain operations–exploring for gold reserves–throughout the world, not only in the country where the stock is listed.
GLDX offers investors a new way to establish exposure to gold by focusing on one of the most speculative and risky points along the precious metal’s supply chain. A look at the fund components sheds some light on the nature of exposure offered by GLDX. NovaGold Resources, one of the largest components of the underlying index, describes itself as a “precious metals company…with the objective of becoming a low-cost million-ounce-a-year gold producer.” During the third quarter of 2010, NovaGold generated revenue of only C$ 462,000, and posted a massive operating loss. But the company maintains ownership interest in some of the world’s largest undeveloped gold projects in the world, and engages in exploration projects to expand known deposits or discover new gold reserves. If the gold reserves at existing projects prove to be massive and reasonably easy to access, NovaGold could hit it big. “Gold exploration companies offer high risk-return characteristics with the potential to strike a gold mine, literally,” CEO Bruno del Ama said. But NovaGold, like many other companies that make up GLDX, is currently losing cash by the boatload–and there is no guarantee that it will ever become cash flow positive.
So GLDX offers exposure to the smallest–and often riskiest–firms engaged in the general gold production industry without concentrating risk in any one project or company. “We believe an ETF is a fantastic structure to provide access to this segment of the gold mining industry,” said Jose C. Gonzalez, Head of Operations at Global X. “This is the venture capital of gold, and GLDX offers the opportunity to capture the fantastic returns of one company striking gold while smoothing over the losses generated by failed projects.” This fund could be appealing to investors interested in accessing the potentially high returns generated through exposure to gold explorers, but without the time, knowledge, or risk tolerance to select individual exploration companies. GLDX allows investors to instead bet on the entire industry in hopes that near-record gold prices will spur explorers to find new deposits, which could lead to enormous gains for a few lucky companies [also read Playing Precious Metals Through Equity ETFs].
Precious Metals Interest Still Soaring
With the U.S. dollar struggling and another round of QE on the way, investors have been quickly jumping off of the greenback’s sinking ship and embracing hard currencies–especially gold–as an alternative. Prices have soared throughout 2010, climbing by more than 20% on the year and repeatedly touching new all-time highs. And many investors believe the yellow metal still has higher to climb; Goldman Sachs recently raised its 12-month forecast for gold to $1,650 per troy ounce, an increase of more than 20% from recent settlement prices. Many investors looking to establish exposure to gold have embraced ETFs as the most efficient tool to do so; at the end of October, the three physically-backed gold ETFs available to U.S. investors–GLD, IAU, and SGOL– had aggregate assets of more than $61 billion. But not everyone is enthusiastic about exposure to gold through holding bullion, an asset that will never generate positive cash flow or make an interest or dividend payment.
A number of exchange-traded products have popped up to give investors indirect access to gold by investing in stocks of companies engaged in various aspects of gold extraction and production. Two of the most popular products in the Commodity Producers Equities ETFdb Category are the Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ), which have amassed about $8.1 billion and $1.6 billion in assets, respectively. GLDX will overlap partially with GDXJ, but will generally focus on early stage activities in the precious metals industry–those that must be accomplished before mining and extraction can begin.
Precious For A Reason
Amidst a prolonged period of high prices, gold has become harder to come by. Although total global mine production of gold has remained relatively stable–it declined by about 2% between 2000 and 2009–some of the world’s most important gold producing countries, such as South Africa and Australia, have seen their production levels shrink dramatically in the past few years. Moreover, both the number of gold discoveries and ounces of gold discovered have plummeted over the last decade, perhaps the result of a reduced emphasis on further exploration when prices were considerably lower than current levels. With gold prices now above $1,300, the mining industry is flush with cash and motivated to uncover new precious metals deposits. That could be a favorable combination for exploration firms, which seem to maintain some considerable M&A upside potential in the current environment.
One of the biggest increases in the demand for gold has been in the investment space; GLD now ranks as one of the ten largest holders of gold bullion in the world, and a number of other investment products, including closed-end funds, gold coins, and even precious metals IRAs, have seen tremendous interest as well [also read Gold ETFs: Boom Or Bust?]. If demand for gold remains elevated, so will the need for the services of the gold exploration industry.
The new fund marks the 15th product from the New York City based issuer, which is perhaps best known for its suites of Chinese and Brazilian sector ETFs. The company’s ETF offering exposure to the Colombian stock market, GXG, has also attracted a great deal of interest thanks in part to blistering performance throughout 2010; which has surged by more than 65% year-to-date. Global X has also made a push into the cleantech space with its recent launch of the Lithium ETF (LIT). In a press release announcing the launch of GLDX, Global X noted that it plans to build on that portion of its lineup later this week; the first Uranium ETF (URA) is scheduled to debut on Friday [also read Beyond GLD: Three Alternative Precious Metal ETFs].
Disclosure: Eric is long LIT.