Excerpts: Gold miners outshine the metal by a wide swath in bull markets. But when the market drops, they dull considerably more. In 2008, when the S&P 500 fell 38%, the Junior Gold Miners index plunged 61%. GDX fell 26%. XME lost 60%. Meanwhile, gold rose 5%.
The Risks
Van Eck warns the potential for big gain comes with great risk.
"Many juniors operated at a loss in 2008 and approximately a third of the companies in the fund's underlying index had negative cash flow on a trailing 12-month basis as of June 30, 2009," Van Eck said in a statement. "Juniors are particularly vulnerable to the price trend of gold as a drop in gold prices could affect their profitability as well as their ability to secure financing to develop new and existing properties."
Small-cap stocks often have higher price volatility, lower trading volume and liquidity than large caps.
"Small companies are often subject to less analyst coverage and may be in early and less predictable periods of their corporate existences," said Tom Winmill, manager of Midas Fund (NASDAQ:MIDSX - News), which specializes in precious metals.
"These companies," he said, "tend to have smaller revenue, less management depth and experience, fewer financial resources and less competitive strength than larger companies.""
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