The Direxion Daily Jr Gold Miners Bull 3X Shares (NYSEARCA:JNUG) is not for the faint of heart. JNUG is a leveraged ETF, meaning it attempts to return three times the movement of normal sector funds. The gold fund is also focused on junior miners — the smaller and more volatile players in the space.
But ahead of the Federal Open Market Committee (FOMC) meeting on Sept. 20-21, gold miners have been fading fast. That doesn’t make a lot of sense to me, and I expect a quick pop in both gold and gold miner stocks next week.
So I decided to take the tiger by the tail and just snapped up 250 shares of JNUG at $17.43.
Why JNUG is a Buy Before the Fed Meeting
I didn’t buy other gold investments like the SPDR Gold Trust (ETF) (NYSEARCA:GLD), the iShares Gold Trust (ETF) (NYSEARCA:IAU) or the ETFS Physical Swiss Gold Shares ETF (NYSEARCA:SGOL) despite the fact they are much larger, with $40 billion, $10 billion and $1 billion in assets each, and are direct plays on physical gold.
That’s because I don’t think this is a gold play as much as a miners play.
In the past month, gold bullion prices are down by 2% while many miners have declined much more. Goldcorp Inc. (USA) (NYSE:GG) is down 16% in the last 30 days, and Barrick Gold Corporation (USA) (NYSE:ABX) is off by almost 20%. It just doesn’t make sense that the miners would suffer that much more pain despite firm pricing for the very commodity they pull out of the ground.
I also happen to like junior miners more, precisely because these smaller gold players are more volatile — both to the downside, and to the upside. Consider that Yamana Gold Inc. (USA) (NYSE:AUY) and Kinross Gold Corporation (USA) (NYSE:KGC), both companies valued at under $5 billion, are off more than 20% in the past 30 days.
Again, gold is only down about 2% or so in that same period. That’s a disparity that simply should not exist.
So, I expect the market to resolve itself — and junior gold miners to see the biggest pop. That’s why I’m banking on a 3x leveraged gold ETF like JNUG to get me there. The Direxion Daily Gold Miners Bull 3X Shares (NYSEARCA:NUGT) is also OK if you prefer bigger miners, or funds like the the ProShares Ultra Gold (ETF) (NYSEARCA:UGL) if you want to play bullion directly and want 2x instead of 3x leverage.
But hey … if you’re gonna be a bear on this trade, be a grizzly.
What Could Go Wrong With This Gold Trade?
In short, a lot can go wrong with a risky trade like this. Gold could crash — or, as we’ve seen, gold could just drift slightly lower and the miners themselves could crash and send JNUG lower in a hurry.
But I don’t think that’s going to happen. Yes, the CME Fed Watch tool indicates there’s a chance of a rate increase … but the probability of rates staying in the current range is 88%. I’ll take that bet.
It’s an election year, for Pete’s sake, and I just don’t think there will be a big policy change months before the vote. And for all those people talking about the inevitability of a rate hike, we saw a lot of similar hype in September 2015 come to naught.
Look, this is not a sure thing. It could blow up in my face. But already, less than an hour after my purchase, JNUG is up over 3% from it’s early morning lows when I bought.
Hey, what could go wrong?
Don’t worry, I’m sure to tell you next week, after the fact …
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he was long JNUG.