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For those who, like myself, feel as though gold is about to go on a major tear anytime soon, a number of options are available to invest in the precious metal.
One can choose to buy physical gold coins or bars and sit on these, waiting for an increase in gold prices. This strategy requires storage and outsized fees for buying and selling the currency (to a much greater degree than trading securities).
Another option is to invest in futures contacts or exchange traded funds (ETFs) which buy such contacts on investors behalf. In this article, I’m going to discuss why the VanEck Vectors Gold Miners ETF (NYSE:GDX) is probably the best choice for investors seeking maximum exposure to gold prices.
This ETF tracks the broad group of gold miners, providing investors with a widely diversified portfolio of companies tracking this sector. This allows investors to essentially eliminate the mine-specific risks a particular gold miner may have, while holding the outside returns a gold miner will receive from an increase in the price of gold.
Gold miners experience operating leverage – by utilizing debt to increase production, a disproportionate increase in a miner’s earnings can come from a smaller increase in the price of gold.
For example, if gold prices were to increase 25% in a given year, many miners might experience a profit increase of 200% or 300%, as most of the increase in gold prices tracks directly to the bottom lines of most companies as fixed costs remain relatively constant.
Invest wisely, my friends.