Folks looking to make a fortune in small gold stocks need to be careful: There's a right way to do it... and there are a lot of wrong ways to do it.

 

One of the wrong ways to do it is by owning one of the world's most popular ETFs right now. The symbol is GDXJ. It goes by the name "Market Vectors Junior Mining Fund." And that name is a snow job.

 

"Junior" miners are the bloodhounds of the mining world. They are tiny companies that scour the world looking for the next big gold or silver discovery.

 

And when I say "tiny companies," I mean it. Junior miners are microscopic compared to the popular mining companies you might now. Many junior miners are around $30 million in market value. Compare this to mega-gold miner Barrick, with a market value of around $52 billion. That's more than 1,700 times the size of a $30 million company.

 

Junior mining stocks are popular with investors and traders because of this tiny size... and because they offer the chance for once-in-a-lifetime gains. When one of these tiny companies finds a big precious metals deposit, the returns are extraordinary. They can turn a modest $5,000 investment into hundreds of thousands of dollars.

 

That's why, from a marketing standpoint, calling a big investment fund a "junior mining fund" makes sense. But in reality, it's impossible to pull off.

 

You see, there's no way a big investment manager can place a large amount of money into a tiny gold stock without causing a huge jump in its share prices. Plus, regulators place restrictions on investment companies to prevent them from owning too much of one company. Big investors, like fund managers, can't operate in this sector.

 

So is GDXJ really trying to invest in junior miners? Let's take a look under the hood...

 

The average market value of the companies GDXJ owns is $1.6 billion. That's 500 to 800 times the size of most juniors.

 

GDXJ owns these multibillion-dollar miners because they have the size to handle big fund flows. Real juniors do not. The folks running GDXJ are calling it a "junior" fund because of the huge interest in tiny gold stocks right now.

 

Don't get me wrong. GDXJ owns a lot of great mining companies. And it's just the nature of selling to give something a name the public will be interested in. You'll probably make good money with this investment if gold and other metals keep rising in price... but it ain't a junior mining investment.

 

That's actually good news for us: Small investors willing to do their homework and know the best companies in the sector have a big edge. These companies are too small for Wall Street to play around in.

 

Good investing,