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Marin Katusa: Capitalizing on Summer Rebalancing in the Resource Market by Nick Hodge

Publisher's Note: We have two special situations unfolding right now in the resource space that can either lose or make you some serious money. A major gold ETF is changing its mandate, which will necessitate significant buying and selling over the next few months. Similarly, the Russell 3000 is about to rebalance and new inclusions will see significant buying. I got fund manager and bestselling author Marin Katusa on the phone to spell out what it means for us as investors. 



Nick Hodge: Hi, this is Nick Hodge, founder of The Outsider Club. I have for you a wonderful guest today. It's Marin Katusa. He's president of Katusa Research, also a highly successful resource fund manager. He's arranged over a $1 billion in financings, he's written a New York Times bestseller called "The Colder War" and he's visited over 500 resource projects in more than 100 countries, so I think he qualifies as an expert, since we're going to be discussing resource stocks today. Marin, thanks for joining us.Marin Katusa

Marin Katusa: It's my pleasure, Nick.

Nick Hodge: Now, Marin, there's a couple of situations happening in the resource space, especially as it relates to funds, that I wanted to get you on the phone and talk about today. You've written a little bit about this over the past week or so, and it pertains to the highly popular VanEck Vectors Junior Gold Miners ETF and that, of course, trades under the ticker GDXJ. As it happens, it's gotten a little bit too popular for its own good and it ended up having to buy some stocks that weren't necessarily a part of its mandate, some stocks that were larger than juniors. I won't give it all away but do you want to give us a little bit of background on how this fund got in this position and then we'll do some follow ups from there?

Marin Katusa: Yeah, well you kind of hit it on the head there, so if you look at ... In 2010, they had over $1 billion in assets and as the market grew, people were going, "Jeez, you know, it might be easier to just buy an index of these things" and the GDXJ was always founded on buying these juniors but what happened was, from 2010 to, say, 2016, the GDXJ grew by over 300% and it got to almost $5 billion of the market cap. Now, that might not seem like a lot of money but the junior index, the whole universe of all the market caps is about $20 billion, so clearly the GDXJ's mandate, they started buying up the 20%, just under 20% of these juniors and they realized, "Uh oh. We have a fundamental problem here," so they started buying bigger and bigger companies, so companies that started having $300, $400, $500 million dollar market caps, then a $1 billion market cap and they've realized that, "Oh my god, how do you get out of these things?" So what happened then was they're basically turning the GDXJ for junior to basically a GDX, really big mid-tier to small major because they're buying Kinross and Harmony Gold and they're not buying these juniors so they have to dispose of the shares of these juniors into the market.

Now, normally, when the GDXJ started, this wouldn't be a big deal but because the index funds now have to report everything that they do, the short funds come in and make the trade before GDXJ has to happen, so a domino or a trigger effect happens in the market. So if you're in the GDXJ, now that GDXJ is basically changing their mandate to bigger companies, they're going to be selling a lot of these smaller companies and the liquidity in the market's not there, compound that issue with the short sellers who are selling before GDXJ, so it creates like a double selling effect and there's many funds, Nick, I know many, many fund managers in the industry that their performance is based off of the GDXJ so they kind of have to play the best of the GDXJ and now that the GDXJ is basically changing the rules, they also have to change their fund rules so that's going to cause even more selling, so it's like a trifecta of selling.

Nick Hodge: So, when do you see all of this playing out? Is there a certain date? When does GDXJ have to dispose of their junior shares?

Marin Katusa: Well, it's started already because of the other fund managers and the short funds, who... I basically published a chart on my website saying, "Hey, if you own any of these 20 companies, be careful because the funds are going to be selling it and at some point it's going to become a buy" so the GDXJ's just starting now the process but it's going to really effect in June. That's when the real selling's going to start, in about three weeks.


GDXJ Rebalance
Nick Hodge: But this is an opportunity, right? Because, ultimately, what's going to happen is there's going to be some stocks that end up-

Marin Katusa: A washout...

Nick Hodge: Yeah, there's going to be some stocks that end up getting sold for below their intrinsic value and not only that, there's going to be a new junior ETF from what I understand that's going to be created, that's going to, I think, eventually come in and have to buy some of these equities, so, you know, how are you viewing this situation for your fund and for your subscribers?

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Name Last Change
DOW 24448.70 0.06%
S&P 500 2670.29 0.01%
NASDAQ 7128.60 0.25%
TSX 15552.06 0.44%
TSX-V 797.41 0.00%

Resource Commodities

Name Last Change
Gold 1326.37 0.57%
Silver 16.69 0.42%
Copper 3.11 0.76%
Platinum 920.97 0.09%
Oil 68.64 0.35%
Natural Gas 2.74
Uranium 24.25 N/A
Zinc 1.47 0.00%


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