In many ways, the Direxion Daily Junior Gold Miners Index (NYSEARCA:JNUG) functions like a call option on gold prices. As with call options, investors whose thesis and timing are correct can make a lot of money on JNUG stock.
But if those who buy the exchange-traded fund are wrong, they will likely lose their entire investment.
Multiple other InvestorPlace columnists have emphasized how dangerous the Junior Gold Miners Index can be. For example, Ian Bezek wrote:
“During the market crash in March, junior gold mining stocks got pummeled. Throw 300% leverage on top of that, and the junior gold miner ETF had an absolute bloodbath. The shares plunged as much as 96% in the span of a few weeks.”
However, there hasn’t been as much emphasis on what can go right with JNUG. If investors’ timing is correct, JNUG stock, like call options, can generate very big returns in a short amount of time.
For example, in late 2013 and early 2014, the European debt crisis was raging as were worries the European Union would disintegrate. But the ETF nearly tripled in less than a month. Specifically, JNUG stock went from $13,430 on Dec. 16, 2013 to $39,910 on Feb. 10, 2014.
Brexit caused another huge spike in JNUG stock. The Brexit referendum was held in June 2016. From May 23, 2016 to July 4, 2016, the ETF more than tripled. It climbed from $1,982.40 to $6,013. And during the massive stock market pullback at the end of 2018, JNUG stock delivered a pretty good return, climbing from $350 on Nov. 19 to $506 on Dec. 21.
Even early in the novel coronavirus crisis, it was possible to make some money on the ETF. Specifically, it jumped from $732 on Feb. 14 to $955 on Feb. 24 and from $467 on Feb. 28 to $669 on March 5. But as many have pointed out, it subsequently lost almost all of its value as investors rushed to cash and U.S. Treasury bonds.
Lessons Learned From History
Based on the ETF’s past rallies and its collapse earlier this year, I think investors should look at it as a short-term call option that should be bought toward the beginning of periods of significant uncertainty. However, I believe that investors should stay away from it during times when there is tremendous fear of the entire economy collapsing.
Here are a few potential scenarios that could spark a rally in JNUG stock over the next year or two. Fears about a real collapse of relations between the U.S. and China could cause the ETF to surge in a short time. The possibility of one or more American states going bankrupt would likely cause the ETF to jump. And signs of inflation beginning to become an issue — a real possibility given the trillions of dollars that the Federal Reserve is circulating — would likely cause gold prices to rally, lighting a fire under JNUG stock.
If, however, for one reason or another, there are real fears about the stability of the U.S. government or more worries about the economy completely cratering, I would advise staying away from the Junior Gold Miners Index.
The Bottom Line on JNUG Stock
The ETF should be viewed like a one-month or two-month call option. That is, investors should realize that they can make a great deal of money on the investment, but that they can also lose all of their principal.
Further, the ETF should be bought during periods when there are fears about the stability of the economy, but not when there is widespread worry that the economy will collapse. The ETF is also worth considering if inflation starts to meaningfully climb.
As with call options, investors who buy JNUG stock can consider using hedges to offset their losses in case their thesis or their timing proves to be incorrect. For example, if they buy $5,000 of the ETF, they can short $2,500 worth of shares of a single, weak gold mining stock.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace since 2015. Among his highly successful, contrarian picks have been Lyft, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, Larry Ramer did not own shares of any of the aforementioned securities.