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Thursday, November 11, 2010








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Go for the Gold with Mining ETFs
by Ron Rowland

Dear Subscriber,

Ron Rowland

Do you like to dig? I have to admit, it's not my favorite thing. But if I knew there was gold in the ground I might think differently.

In fact, there is gold in the ground — and plenty of other valuable minerals, too. The hardest part is finding it. However, the digging gets a lot easier when you know where to aim.

Exchange-traded funds are a great way to guide your shovel toward profits in the mining sector. Today I'll tell you why. I'll also name several ETFs to consider if you want to get involved in this potentially highly profitable business.

Before we go any further, we need to make an important distinction ...

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Mining sector ETFs are not the same as ETFs that are based on physical metals. Mining stocks are still stocks. Their performance is related to the underlying commodities — but not always. For instance, gold and silver mining stocks can go down even if gold and silver bullion go up. Or the miners can be up when the metals are down.

There's Gold in These ETFs

Gold is the ultimate store of wealth.
Gold is the ultimate store of wealth.

Gold's allure is ancient. People have been searching for it, mining it, stealing it, and trading with it for thousands of years. Even in a world of paper and electronic currencies, gold is still widely accepted as the ultimate store of wealth.

Unfortunately, gold isn't so shiny in its natural state. Usually it is found in tiny or even microscopic particles, deep underground or dispersed across large areas. This scarcity is what makes gold so valuable.

You might not be a prospector yourself, but you can still share in the profits by bankrolling today's forty-niners. Here are three ETFs that focus on gold mining stocks:

  • Market Vectors Gold Miners (GDX) is the most-active ETF in this category and also the most liquid. It concentrates on the liquid, large-cap stocks of companies in the gold mining business.

  • Market Vectors Junior Gold Miners (GDXJ) zeros in on small-cap gold producers. These are riskier stocks, but they also have tremendous potential.

  • Global X Gold Explorers (GLDX) is a new fund that tries to get even more specialized. It owns early-stage companies that are still looking for gold — and haven't necessarily found it yet. As you might imagine, this makes GLDX a high-risk play with potentially great rewards.

Gold isn't the only precious metal, of course. Let's widen our view to look at some others ...

Silver, Platinum, Copper and More

Silver and platinum are also very rare, and throughout history they have been used in much the same way as gold. Silver is often thought of as the "poor man's gold." And platinum is even more valuable than gold in some ways.

Then there is copper ...

Wire products are a major user of copper.
Wire products are a major user of copper.

Used primarily for industrial purposes, copper is often found alongside silver. For this reason it is sometimes thought of as a semi-precious metal. Pennies used to be pure copper; today they are mostly zinc with a thin copper plating.

You've probably heard a lot of buzz lately about "rare earth" metals. These are super-rare minerals needed for high-tech manufacturing. Some of them are extremely valuable — and extremely scarce. Mining for them can be a very profitable business.

You can take your pick of mining stocks focused on all these metals. If you want to go the ETF route — which I highly suggest — here are some to consider:

  • Global X Silver Miners (SIL)

  • First Trust ISE Global Platinum (PLTM)

  • Global X Copper Miners (COPX)

  • First Trust ISE Global Copper (CU)

  • Market Vectors Rare Earth/Strategic Metals (REMX)

The Hottest Metal: Uranium!

Uranium is found in low levels within rocks, soil and water and is more common than silver. The ore is crushed and refined into the pure metal.

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Today uranium's primary use is in nuclear reactors. One kilogram of uranium can provide as much energy as tons of coal. That's a lot of power!

Yes, there are some environmental and safety concerns. But fossil fuels aren't so clean, either.

Uranium is a big source of electricity.
Uranium is a big source of electricity.

As a result, I expect uranium demand will continue to increase — and the companies involved in producing it will continue to profit. Which stocks?

Right now the uranium industry is dominated by a handful of companies. This could change quickly as the business matures.

A good way to cover all the bases in uranium is with a new ETF, Global X Uranium (URA). URA just came out last week but trading has been heavy so far.

There are many other ETFs with varying levels of exposure to the mining sector. Those I've named here are only a small sample. The list is growing quickly as ETF sponsors try to get a piece of this fast-growing niche.

Be aware that mining stocks, other than a few in the large-cap category, tend to be small and illiquid. The same applies to the ETFs that own these stocks. Watch the trading volume and use a limit order whenever you buy or sell.

Best wishes,

Ron

P.S. To all you veterans out there, Happy Veteran's Day! Thank you for your service.


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