The Real Message From The GDXJ Mess

Tyler Durden's picture

Authored by Kevin Muir via The Macro Tourist blog,

In what seems a lifetime ago, I was the equity index trader at a big bank on Bay Street. Although a lot has changed since then, there are parts of the game that are timeless. So I am putting my old hat back on to analyze VanEck’s recent problems arising from the success of their GDXJ ETF (Junior Gold Miners). And lest you think this will be a boring ETF specific piece, I urge you to suffer through the details as I believe the market is missing the bigger picture message.

For those unaware, VanEck recently announced they were halting the creation of the their GDXJ 3x times Bull shares (JNUG) because they were running into constraints. In fact, the popularity of the GDXJ ETF product has been so overwhelming, VanEck also reported they would be changing the index rules to accommodate the increased demand. From Bloomberg:

The world’s second-largest exchange-traded fund linked to material producers has become the victim of its own success.


With investors piling in amid a precious-metals recovery, VanEck Vectors Junior Gold Miners ETF’s assets jumped 60 percent to $5.54 billion this year. That created a dilemma for the fund that tracks the MVIS Junior Gold Miners Index, as its holdings surge above 10 percent of some of the companies it owns.


On Thursday, MVIS Index Solutions, a VanEck company, announced changes to its equity indexes, widening the criteria for inclusion into the gauge that is tracked by VanEck’s junior gold miner ETF.


“This is the curse of success,” said Sameer Samana, a St. Louis-based global quantitative strategist at Wells Fargo Investment Institute, which oversees $1.8 trillion. “They’re starting to run into issues of how much they own in certain names, how many names qualify for the index and they’re running into issues of how big the fund has gotten.”


Investors poured $1.5 billion into VanEck Vectors’ junior miner ETF this year, the most among global peers tracked by Bloomberg. Assets in the most popular mining ETF, which trades under the ticker GDXJ, climbed amid rising interest in small companies as large producers emerging form the downturn scout for new reserves.


The ETF was growing so fast it was in danger of having the kind of stakes in some junior miners more usually associated with large institutional or activist investors. That, in turn, could be an issue for individual shareholders who might worry such large “passive” holdings could ease pressure on boards around corporate governance, Eric Balchunas, an ETF analyst for Bloomberg  Intelligence, said by telephone.


GDXJ invests at least 80 percent of its total assets in securities in the MVIS Junior Gold Miners Index, giving it enough wiggle room to add other companies. Its third-largest holding is VanEck Vectors Gold Miners ETF, which trades under the ticker GDX and tracks the NYSE Arca Gold Miners Index. reported GDXJ’s rapid growth, forcing it to deviate from its underlying index on April 10, before MVIS index announced changes to the gauge.

Some of the more vocal members of the finance community mistakenly believe this is the result of the uncertainty created from Trump’s recent firing of missiles on Syria.

Although there was an increase in GDXJ buying following Trump’s Middle Eastern foray, this problem has been long in the making.

The recent Syria missile strike was not the problem. No, there has been steady increased demand for GDXJ for the past year.

Even though I disagree with my friendly bearish tweeter, he is correct that GDXJ will probably suffer in the coming the weeks. But probably not for the reasons he thinks.

Many will probably look at the increase in GDXJ shares outstanding and think there must be tons of weak longs. Yet, often violent expansions in ETF shares outstanding, are the exact opposite of bearish. These newly created ETF holders might in fact be the ‘smart money,’ not the other way round. Last year’s oil collapse was the perfect example.

So if massive ETF share expansion is a sign of ‘smart money’, why do I think GDXJ might suffer in the coming weeks?

The GDXJ ETF has become so popular, the VanEck ETF holding company is bumping up against 20% ownership in some of these junior Canadian gold miners. From a regulatory perspective, it is difficult to go above the 20% threshold without triggering automatic takeover laws. Also, from a tax perspective, there are some arcane laws pertaining specifically towards ETFs that VanEck was also battling due to the composition of the index.

Faced with all these problems, VanEck chose to dramatically alter the composition of the underlying index that GDXJ is supposed to track. They announced their intention to make these changes on June 17th, but in the meantime, have released their new guidelines for the index.

Over the years I have relied on one firm’s index research more than any other. In fact, even when I was the trader at another bank, I would desperately seek out TD’s Peter Haynes’ research pieces. Peter has been doing this so long, there is a rumour he is grooming his high school aged son to take over his post when he retires to pass along the family business.

Now here comes the important part. Have a look at TD’s index research group’s projected flows arising from this index rebalance. First the adds:

Next up, the deletes:

Look at these numbers! Most importantly, look at the “Days to Trade” column. It represents how many average days’ volume the estimated index flows will take to complete. These are big numbers.

These index flows will affect the index. No two ways about it.

In the coming weeks, the stocks underlying the GDXJ ETF will have the constituent members decline due to the selling, and the members with increased weightings (and new additions) will see their share prices increase. Of course this will all be on a relative basis. But taken together, this large demand for liquidity will result in GDXJ returning much less than would be the case had there been no index rebalance.

To avoid this drag, the obvious no-brainer move would be to swap GDXJ for GDX. It’s not quite that easy as the GDX is comprised of senior gold companies, while GDXJ owns the junior ones. The beta on the junior miners is much higher. Therefore, you might need to volatility adjust the position.

But this swap is the sort of trade needed to avoid the massive GDXJ underperformance that will be experienced due to the upcoming rebalancing.

Let’s step back and really think about this…

Although many are in a tizzy about the “potential” breakdown of the ETF model, and drawing all sorts of ominous conclusions about this hiccup, I take a much different view.

Did investors become too enamoured with GDXJ? Yup, you betcha. But why? And what might this mean for the future?

To answer these questions I refer you back to an absolutely fantastic presentation Grant Williams from RealVision TV fame gave over a year ago. It’s called “Nobody Cares.”.

In the presentation, Grant highlighted how little gold and other precious metal assets are held in pensions. At that time, only 0.15% of pension assets were held in gold and gold equities.

If that were to double, the resulting capital flows would be $100 billion. Grant then went on to demonstrate how much $100 billion would mean to the gold market. For that amount you could buy the following:

The gold market is tiny compared to pension assets. And this example only assumes an increased weighting from 0.15% to 0.30%. Those numbers are still much too low considering gold represents cheap insurance if this whole Central Bank monetary mad science experiment goes off the rails.

Back to GDXJ. While many are viewing this recent episode as an example of why gold investing is best left to the tin foil hat crowd, I wonder if they might be missing the bigger picture.

Maybe this GDXJ problem is the shot across of the bow. Maybe Grant Williams’ theory about how little it will take to move this market is starting to come true.

There is precious little room for everyone in the gold boat. This is made all too clear with the problems we quickly experienced from a little interest in GDXJ.

Can you imagine what will happen if the tide truly turns?

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cossack55's picture

I prefer my gold in PCGS holders

Jim Sampson's picture

Lost all mine in a boating accident. ;)

wanderer9641's picture

I feel you pain - my lake has a silt bottom - still looking in the mud

The Deacon's picture

The potential issue no one has mentioned, including the author, is where are the shares they are buying coming from?

Are dealers simply 'digitally printing' more PM shares for every buyer of those shares?

Are the 'sellers' actually selling shares or just creating NEW digital entries (aka NAKED SHORTING)?

Pehaps if the ETF said, "You know what, we want certificates for all our PM shares, " THAT may blow things sky high.

But maybe not.

I've read stories about PM company annual meetings where the submitted proxies for their shares have exceeded the amount outstanding by 10 to 20%!  Where did these shares come from?

Are these FTD's, just like in the bond market?


Philosophically speaking,  a market THIS SMALL (the smallest?) in the age of printing trillions, should be skyrocketing due to  a lack of supply.  Look what the Dow has done since its bottom in 2008.  How many trillions did that take?


But what do I know?





Jimmy Jimmereeno's picture

Gold's about to take a $100 rip on the downside.  That ought to drill enough new assholes to sort out the ETF conundrum.

TheLastTrump's picture

It will as soon as lil Kim gets solved, which could be early next week.


Or Korea gets worse. In which case your short on gold is going to tear your head off.

83_vf_1100_c's picture

  PCGS, you are paying a hella premium for that case and COA. I prefer BU and an Airtite capsule. Or just a ziplock, it is Gold and does not corrode.

Newager23's picture

On the one hand, it frustrates me that they didn't make GDXJ a closed-in fund, and open a new junior/mid-tier fund called GDXK. On the other hand, this will eventually happen. This article is well thought out. Once gold rips higher and pensions and insurance companies decide they want to own some gold miners, there will not be enough shares. The ETFs will explode in value forcing several to become closed-in funds. I expect GDX and GDXJ to both become closed-in funds.

Perhaps all is well with the economy and gold will not rip higher. That is a possibility. Trump just may have the businessman touch to steer the economy in a positive direction. However, you have to be living in a bubble not to notice the crazy things that are occuring with the economy. We are pretending that debt doesn't matter and central banks can expand their balance sheets to infinity. Did anyone notice that if interest rates rise just a little bit, that the US is bankrupt? 

That is not hyperbole. There is no way we can pay $1 trillion in annual interet rate payments. The dollar will fail under such a scenario. We have $20 trillion in debt and it's rising at $1 trillion a year. Isn't anyone concerned yet? How can you ignore gold (or silver) in such an environment?

The bottom line is that if gold rips, the gold miners will rip. And who will benefit? The gold miner ETFs. It's not that crazy that GDXJ has reached $5 billion. And it won't be that crazy when it reaches $25 or even $50 billion. At some point, they will throw in the towel and make it a closed-in fund. 








Consuelo's picture



I think my Toblerone bar has some of that in it...

VD's picture

GDXJ will go parabolic; i got skin in this game right here.


check back in next few months...

TheLastTrump's picture

JDST/ JNUG both getting a 4 for 1 reverse split May 1st IIRC.

auricle's picture

If the author is correct, then pensions expanding into PM miners will crash all the PM ETFs because it results in them owning more than 20% of all underlying miners? This isn't making any sense. How does massive demand for something result in price decline?


To resolve the above issue, pensions need to first invest in the GLD/SLV which will drive up valuations of miners and take stress off the ETFs. We need a massive gold/silver price spike.

2_legs_bahhhhhd's picture

Precisely....billions of dollars running to gold and gold equities always crashes the price due to excess demand.

Wall Street will never stop coming up with new financial vehicles to prevent pm's to find true value.

greenskeeper carl's picture

While o do hold some of that, holding leveraged ETFs long term is a bad idea.

ejmoosa's picture

So what I am learning here is that if more folks want to buy GDXJ, they do not do so on the open markets?  Instead they send some money in and get new shares?

Here's an idea.  Close the fund and let the damn price rise based on market fundamentals.

ParkAveFlasher's picture

Two distortions off the top of my head, caused by these funds: 1) miners financed up to 20% with lax oversight of actual bag- I mean share-holder and 2) control of sector pricing by a single huge agglomeration pushing 20% of the prices around.

Consuelo's picture



"Can you imagine what will happen if the tide truly turns?"


Gold is a speculative curiosity and that meme will be kept by the gatekeepers and downstream pushers as well in order to keep animals on the reservation.

Boston7708's picture

I bought some golden paper at the dollar store and I hold it.......broken record time you don't hold it you don't own it!

RagaMuffin's picture

Appears to be a way to establish positions in J miners and not report to SEC.......sweet

lester1's picture

Long AUY. Significantly undervalued gold mining company.  :)

greenskeeper carl's picture

Good luck. I still hold some of that and it's way underwater.

Bryan's picture

Generally it's not a good plan to be in the same trade as everyone else.  That includes physical gold, IMO.  Someone is going to mess up that 'sure thing'.

Bam_Man's picture

If "everyone else" owned physical gold, the price would be several multiples of today's.

The "problem" is that these fractionally-reserved, multi-hypothecated paper/digital Gold facsimiles are currently absorbing a large amount of Gold demand. One "falure to deliver" would be all it takes to send demand for PHYSICAL (and the PRICE of physical) to the Moon.

Bryan's picture

We'll see.  I just don't trust governments and bankers not to pull some kind of trick to either kill the value of physical, or just declare it illegal to own or trade with. 

jm's picture

I don't get it.  Why aren't junior miners responding to the ETF demand by issuing more common stock? 

uno's picture

Other EFT companies should start a junior/mid-cap miner etf, so much money wanting into the sector.  

tribune's picture


SRV's picture

I trade the miner ETFs.

The biggest move down here is 4%.

In the Junior Mining sector a 4% move is just a normal day.

Much ado about... 

TheLastTrump's picture

JDST/ JNUG both getting a 4 for 1 reverse split May 1st IIRC.



Al Huxley's picture

This just kills me - 'We've had so much demand for GDXJ that we're going to have to divest of some of our holdings.  So naturally, all this demand for junior gold stocks is causing them to crash'.  Am I the only who feels like he's taking crazy pills here?  WTF? 

ZeroLounger's picture

People want to go and take trips to Ireland and London.  They don't want to invest or save.  Fuhgedaboudit.

ZeroLounger's picture

Take out a home-equity line of credit. Take a vacation.  Borrow money from the relatives after the next crash.  But whatever you do, DO NOT INVEST OR SAVE any!!


That would be too painful!  The ability to delay gratification is supposedly what separates us from the lower chimps.  Well, not anymore!!  I want it NOW!  I want that new car NOW!!  I want that new furniture NOW!  No, I can't pay for it, so I'll just put it on a credit card and go into more debt.

Who cares about tomorrow, right??  ME!  ME!  ME!!  NOW! NOW!! NOW!


Invest in precious metals??? HAHAHAHAHHA!  Fuh-geeedabouuu-dit.

El Hosel's picture

.... All you have to do is look at the way gold and silver have traded since last July. Its rigged to go down, the rallies are weak and choppy with very narrow price action. THE Machine is in control and it wants no competition for US Stawks. The Fed prints Several trillion dollars worth of "stimulus" and gold remains in a bearish correction? Really? Gold chart looks like a SPY ( the "market" that never corrects anymore)chart turned upside down.... Because it is, and it is by design. 

mosfet's picture


Funny in that I just temporarily sold off my entire stake in GDXJ & SIL today to wait out a better price maybe early June, ahead of a 'potential' rate hike.  As they say, "Sell in May and go away."  And if the Fed starts sending out their shills to pump the Dollar - Down Gold will go.  Exhibit A: from last May 2nd thru June 2nd.  If Brexit hadn't happened, Gold would have likely nosed dived right then and there to end up back at $1050 until the Fed hiked again in Dec '16.

Soo many contrarian indicators out there makes it all but impossible to hold declining miners (which completely missed the '17 Gold rally) but the one that finally convinced me was the banksters coming out of their hole for day 2 to dump an extra 3 Billion in paper gold.  It's clear they aren't going to stand for it reaching $1300/oz as the CFTC & Fed give a Big Thumbs Up to let them commit fraud & theft on grandest of scale in broad daylight.  If I didn't know better I'd say Yellen opposes the Trumpster's weak Dollar rant.  She's a seriously passive/agressive alpha cunt isn't she?

The writer claims Vaneck issues 3X leveraged shares when in fact it's Direxion.  VanEck's GDXJ hit $170 in 2011 and didn't seem to have a problem then, yet the writer says they're having trouble managing holdings with price of only $33?  My guess is GDXJ's troubles are rooted more in JNUG & JDST ripping their face off daily due to massive in/out flows from day traders.

If Gold does fall it'll send miners and their ETFs into the abyss but that may be just what's needed to launch the main event for July or Sept.