Hedge Inflation with two gold ETF ideas: GDX and GLD

It seems that everywhere you turn you hear something about the price of gold, from analysts to commercials encouraging you to sell your old jewelry for big bucks. If you’re tempted, how about a bit safer investment in the commodity? Let your money work for you — invest in an Exchange Traded Fund (ETF) that hold shares in several different gold producers, and you can ride the wave of the industry.

Market Vectors Gold Miners ETF (AMEX: GDX) is a perfect opportunity to ride this wave with as the fund’s goal is to mimic the price and yield performance of the AMEX Gold Miners index, before fees and expenses. This is a nondiversified fund that is comprised of several well known companies whose main operations involve gold and silver mining.

There are two reasons to buy GDX instead of the SPDR Gold Trust (NYSE: GLD) or the iShares Comex Gold Trust (NYSE: IAU) both of which are pure gold ETFs (you own a share of gold sitting in a safe). First, the ratio between gold and the value of the gold held by miners has been relatively stable for 30 years. But today, the gold miners are selling at 33% of that historical ratio, so bulls say it’s better to buy the miners, not the metal. Second, the biggest expense of a mining company is energy. Oil today hit $54 per barrel, down 63% from a peak of $147. This adds to the profits of the Gold Miners.

Your investment basket with GDX will include companies such as Agnico-Eagle Mines Ltd. (NYSE: AEM), a gold mining company with mines in Quebec, Finland, Mexico and Nunavut; Barrick Gold Corporation (NYSE: ABX), a mining company with a broader reach, mining for gold, silver, copper and zinc; Gold Fields Ltd. (NYSE: GFI), a strictly gold operation running out of South Africa, Ghana, Australia and Peru; and AngloGold Ashanti Ltd. (NYSE: AU) with gold minds in South African and internationally.

Market Vectors charges only a 0.55% fee to maintain GDX using computers rather than money managers. Take heed, though, as gold prices have dropped nearly 10% in the past three months and GDX has dropped roughly 50%. It’s not a sure gamble, but if you feel strongly about this commodity market it’s a safer bet than putting all of your money into one individual company.

The top 10 holdings of GDX are listed below and it’s hard not to take notice of the heavy concentration on
global exposure in this industry.

5.28% AGNICO EAGLE MINES
5.06% ANGLOGOLD ASHANTI
12.28% BARRICK GOLD
4.55% ELDORADO GOLD CORP
4.39% GOLD FIELDS LTD ADS
10.01% GOLDCORP INC
5.07% KINROSS GOLD CORP
8.44% NEWMONT MINING
5.57% Randgold Resources Limited
4.4% YAMANA GOLD