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Remember that old saying? “Sell pickaxes during a gold rush.”
In the case of 2016, this applies to buying gold miners compared to buying gold.
Gold and silver have made gains in 2016, both beating the S&P 500 Index. But the real profits have been with gold and silver miners.
In fact, the best ETFs in 2016, in the entire investment world, have been from the mining sector!
The two top-performing non-leveraged ETFs with over 1 million average daily volume are SPDR Metals & Mining ETF (NYSE: XME) and VanEck Vectors Junior Gold Miners ETF (NYSE: GDXJ). XME is up 113% and GDXJ is up 81%.
And other mining ETFs have made huge market-beating gains as well, including PureFunds Junior Silver Miners ETF (NYSE: SILJ), Global X Silver Miners ETF (NYSE: SIL) and VanEck Vectors Gold Miners ETF (NYSE: GDX).
The small-cap “junior” miners have bested the larger mining companies in general. They provide better leverage to increased precious metals prices. However, the small mining companies are a tricky group; a lot of research is required on individual stocks.
That’s why a basket of stocks, such as held by these ETFs, is a safer way to go. The impact of any one company is lessened, as is overall volatility and news risk.
Even if you aren’t a “gold bug,” there is a valuable place for gold and precious metals in your portfolio. It provides diversification, in the form of assets that have been traded for thousands of years.
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My preference for 2017 is the gold sector over silver. This is based on the gold/silver ratio, which measures the price of each asset compared to the other.
Gold has steadily outperformed silver since 2011, as you can see on the chart below, using SPDR Gold Shares ETF (NYSE: GLD) and iShares Silver Trust (NYSE: SLV).
Weekly Gold/Silver Ratio Chart
In 2016, silver began to make better gains. However, in recent months, this ratio has turned back around in gold’s favor. I anticipate that will continue in 2017.
On the chart below, you can see that the gold/silver ratio has recently been moving upwards (this means gold has been stronger than silver), with “higher highs” and “higher lows,” a sign of strength.
Daily Gold/Silver Ratio Chart
“Higher highs” means that each time the ratio moves higher, it reaches a higher level than the previous peak. And “lower lows” means that when it pulls back, it rebounds at a higher level than the previous low.
Both of these indicate that big buyers are jumping into gold (when compared to silver) in increasing amounts, and the combination of both is a clear sign of relative strength. “The trend is your friend,” and it is moving higher.
With the long-term outperformance of gold vs silver back underway, gold ETFs are the way to go in 2017. And for the most leverage on a move in gold, you should invest in the Junior Gold Miners ETF (GDXJ).
A further great way to get more bang-for-the-buck on moves in gold, silver and miners is to purchase in-the-money options on these liquid ETFs.
In-the-money options have limited risk, act as a stock substitute, have very little time decay and can even be traded in brokerage IRA accounts.
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