Q. So Junior Gold Miners ETFs have been a popular way of playing gold prices– and they’re being beaten up pretty badly lately. Talk to us about investing in these as opposed to the metal itself.
A. As we mentioned just the other day, gold ETFs divide into those that invest in the physical commodity, and those that invest in gold mining companies. “The Juniors” are small cap gold miners, and the ETFs invest in their stocks. Many people consider them to be, essentially, a leveraged way of playing the gold space And I know some people who think the gold move is overdone, who are buying them this morning…

Q. So why is this a “leveraged” play on gold?
A. Because many of these firms hold big gold reserves, but don’t have robust mining operations to go around them. Gold is incredibly expensive and difficult to produce, which is one reason its advocates like it as a form of money– and why its haters hate it– you can’t simply print more when you want. The juniors have the reserves, and little else– so if the price of gold pops, and it becomes economical to pull it out of the ground and refine it, the price of those stocks will pop too. At least, that’s the idea.

Q. So these ETFs tend to trade with greater volatility than the ETFs actually holding the metal.
A. Right. And lately, the price of them had been falling even faster than the metal– the inherent leverage works both ways, of course: if the price of gold falls, the stocks are worth very little because these companies are that much farther away from being able to pull it out of the ground and sell it for a profit. Anyway, the big disparity over the last few weeks in particular led to some buying in the juniors last week– but a lot of those buyers wish they’d waited till today!

Q. But if you do think gold is oversold and want to play a rebound, investing in the juniors is one way to do it…
A. Yes, but not, frankly, for me. The reason to buy gold (to me) is as insurance against inflation, not for speculation. ETFs that invest in the physical provide more of the former; ETFs that invest in the juniors provide more of the latter. But, of course, to each his own.