Top picks 2012: Market Vectors Junior Gold

With the smaller, less liquid and more speculative junior miners and explorers having been �clocked� by a fearful and worried market, we think positioning a reasonable portion of one�s portfolio in the Market Vectors Junior Gold Miners ETF (GDXJ) makes sense. �

First, we expect this ETF to rebound in 2012; long-term, we expect these mining shares to finally �answer� higher metals prices ahead.

The GDXJ tracks and attempts to replicate as closely as possible, before fees and expenses (reasonably capped at 0.54% per annum), the Market Vectors Junior Gold Miners Index. �

Smaller, more speculative mining companies can be extremely volatile individually and most are considered more risky than their larger cousins, but the exchange traded fund GDXJ spreads the risk out among a basket of nearly 80 companies. �

The small (under $1 billion in market capitalization) to mid-sized ($1 billion to $5 billion market cap) firms in the ETF are literally the �food� for larger, so-called major mining companies such as Barrick, Newmont or Goldcorp.

Successful junior miners that have put important new deposits of precious metals into production allow the majors to replace their declining metal reserves. �
Part of the allure of the smaller companies is their potential to be gobbled up by the �bigs,� and through GDXJ investors gain exposure to many of the companies on the large miner shopping lists.�� �

Gold and silver have been gaining in value for most of the last decade when measured in paper U.S. dollars. �

As more and more people come to understand that governments worldwide have chosen to print oceans of their fiat currencies, literally debasing them by increasing the quantity of �money� in the global financial system, wealth is migrating to precious metals in order to preserve purchasing power. �

Gold and silver are apparently moving higher in price, but in reality what is happening is that dollars, yen, euros and other fiat currencies are losing purchasing power.� We believe that worldwide weakening of paper currency is bound to continue and will likely accelerate in the near future. �

The �cheaper� dollars are not that good for public confidence, or savers, or people on a fixed income, but cheaper dollars are good for at least two things. �

Cheapening the country�s currency makes it easier for the government to pay the enormous national debt racked up by irresponsible elected representatives, and higher prices for gold and silver should be good for companies that look for and produce the precious shiny metals.

Interestingly, gold has corrected as much as $360 or 18.8% since it topped in early September near $1,924 the ounce. �

The metals correction and heightened fear by investors as Europe undergoes a tortuous restructuring of its mountainous debt is in large part why GDXJ has sold off more strongly than the indexes that track the larger miners.

The volatility of the smaller mining company GDXJ is roughly about double the indexes of the larger mining companies then.

So when confidence in the junior mining sub-sector returns, the very high volatility of small mining shares can and should work to the upside just as it did to the downside in late 2011.

With a reasonable expense ratio, a wide sampling of some of the most promising junior miners and explorers and, arguably, a beaten up share price, we�re looking for a return of confidence by investors in mining shares and intend to accumulate GDXJ.

Learn more about this financial newsletter at Gene Arensberg's Got Gold Report.