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Eric Sprott Warns Of Major Sell Off In Gold Mining Stocks As Top ETF Is Forced To Rebalance Holdings

by Mac Slavo, SHTFPlan:

If you’ve been watching the gold mining sector lately then you may have noticed a recent dip in prices. While this may normally be a sign of problems in the space, as Eric Sprott points out in his latest interview with SGT Reportthe reason behind the down-move is actually the opposite of what you may think. As Sprott explains, the popularity of one of the world’s largest gold related Exchange Traded Funds (ETF), the VanEck GDXJ, which is designed specifically to track junior gold mining companies, has led to massive inflows of cash from investors. That, of course, is a good thing for the precious metals sector as whole. The short-term downside is that the ETF grew in popularity so quickly, that it has too much cash and not enough places to put it. The reason for this is that regulatory rules limit how much the GDXJ ETF can invest in any single company – currently at 20%.

What this means is that by June 17, the GDXJ ETF must re-balance its entire portfolio by way of selling junior mining company shares before it can re-invest those funds into new holdings. And as you may have guessed, that has put serious selling pressure on some mining companies that are currently being held by the fund.

But the selling pressure, says Sprott, will be short-lived and has actually created a unique and potentially very profitable scenario for precious metals investors:

The problem that VanEck found with the GDXJ was that there was too much interest in it… their standard was they didn’t want to own companies with a market cap in excess of $1.8 Billion… In order invest as many funds as were flowing into it they ended up owning large concentrations of ownership in the companies… Things became very complicated for the GDXJ… The premise is that the buying interest in junior gold stocks is causing the change… 

The stocks that exist in the fund up to June 17… Most of them, their weightings will fall to about 50%… Which means that the ETF has to sell… So you’re getting this rebalancing… People are acting in the market to sell ahead of the trade on June 17… It’s putting pressure on the stocks… and ultimately when all this is over these stocks are going to go back to where they were.

The interview, which also features First Mining Finance Chairman Keith Neumeyer, is a must watch for those struggling to understand how record interest in the GDXJ is actually about to cause the prices of some junior mining companies to drop, as well as how to identify profit opportunities over the next month while the effects of the sell-off play out:

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