More detail on GDXJ winners, losers

Via ZeroHedge, by Kevin Muir / Macro Tourist Blog

Now here comes the important part. Have a look at TD’s index research group’s projected flows arising from this index rebalance. First the adds:

Next up, the deletes:

Look at these numbers! Most importantly, look at the “Days to Trade” column. It represents how many average days’ volume the estimated index flows will take to complete. These are big numbers.
These index flows will affect the index. No two ways about it.
In the coming weeks, the stocks underlying the GDXJ ETF will have the constituent members decline due to the selling, and the members with increased weightings (and new additions) will see their share prices increase. Of course this will all be on a relative basis. But taken together, this large demand for liquidity will result in GDXJ returning much less than would be the case had there been no index rebalance.
To avoid this drag, the obvious no-brainer move would be to swap GDXJ for GDX. It’s not quite that easy as the GDX is comprised of senior gold companies, while GDXJ owns the junior ones. The beta on the junior miners is much higher. Therefore, you might need to volatility adjust the position.
But this swap is the sort of trade needed to avoid the massive GDXJ underperformance that will be experienced due to the upcoming rebalancing.
Let’s step back and really think about this…
Although many are in a tizzy about the “potential” breakdown of the ETF model, and drawing all sorts of ominous conclusions about this hiccup, I take a much different view.
Did investors become too enamoured with GDXJ? Yup, you betcha. But why? And what might this mean for the future?
To answer these questions I refer you back to an absolutely fantastic presentation Grant Williams from RealVision TV fame gave over a year ago. It’s called “Nobody Cares.”.

In the presentation, Grant highlighted how little gold and other precious metal assets are held in pensions. At that time, only 0.15% of pension assets were held in gold and gold equities.

If that were to double, the resulting capital flows would be $100 billion. Grant then went on to demonstrate how much $100 billion would mean to the gold market. For that amount you could buy the following:

The gold market is tiny compared to pension assets. And this example only assumes an increased weighting from 0.15% to 0.30%. Those numbers are still much too low considering gold represents cheap insurance if this whole Central Bank monetary mad science experiment goes off the rails.
Back to GDXJ. While many are viewing this recent episode as an example of why gold investing is best left to the tin foil hat crowd, I wonder if they might be missing the bigger picture.
Maybe this GDXJ problem is the shot across of the bow. Maybe Grant Williams’ theory about how little it will take to move this market is starting to come true.
There is precious little room for everyone in the gold boat. This is made all too clear with the problems we quickly experienced from a little interest in GDXJ.

Can you imagine what will happen if the tide truly turns?