Last week we noted the following data point regarding the commodity futures market: Bianco Research estimates the total value of present open interest in domestic commodity futures is about $425 billion.
We commented how the $425 billion estimate wasn’t even as big at the market cap of a single company; Exxon Mobil. That got us thinking. I asked the following: What is the market cap of the biggest publicly traded stocks in the gold mining sector – Barrick Gold, Goldcorp, and Newmont Mining? The answer: $42 billion, $29 billion, and $22 billion respectively. What might that tell us?
I took it one step further. Let’s analyze our favorite gold and silver mining ETF — the Market Vectors Gold Miners ETF, symbol GDX. It is comprised of a diversified group of companies involved in the mining of gold and silver. It is a broad mix of small-, medium-, and large-cap names. It has global exposure, led by Canada, United States, and S. Africa.
The requirements to be eligible for the fund are a market cap exceeding $100 million, average daily trading volume of at least 50,000 shares, and listed on the NYSE or Amex, or quoted on the NASDAQ.
There are 34 companies represented in this ETF. The TOTAL MARKET CAP of all companies combined is $190 billion. The top 11 companies in this ETF make up $163 billion of the total, or 86% of the entire cap. The weight of these top 11 stocks as a percentage of the ETF is approximately 73%.
For comparison purposes, there are six individual companies alone in the S&P 500 with larger capitalizations than all of the stocks combined in the ETF. They are in descending order:
Exxon Mobil 441.9B
General Electric 317.2
Proctor & Gamble 202.5
In getting my arms around the market cap of the mining sector, I came to the following conclusions. Any significant interest or institutional buying could propel these shares much higher, as there isn’t a whole lot of stock around in the first place. For example, a Berkshire Hathaway with $47 billion in cash, or a Microsoft with $19 billion in cash (before a Yahoo acquisition), could take down big chunks of the ENTIRE sector combined!
What if the California Public Employees Retirement System (Calpers) decided to over-weight the mining sector? This is a fund with over $250 billion in assets, or if a Texas Teacher Retirement System Fund (TRS) — a $100+ Billion fund, wanted a bigger stake in gold or silver companies? The cap of all these stocks combined is tiny compared to the large pools of money that exist out there!! You could buy 23 of the 34 smallest stocks in the Gold Miners ETF (GDX) for a grand total of $27 billion at today’s prices!
Think of it this way, IBM recently announced a $15 billion share buy back. They will issue debt at today’s rock bottom rates available to A+ type companies, and buy back the shares using debt, a common practice. Perhaps they could issue more debt, and buy some gold shares? What about an Intel, holding $15 billion in cash alone, they could go on a shopping spree, maybe they might want to diversify away from semiconductors? And yes, Google could spend some of their $14 billion cash hoard on a few gold & silver companies; maybe a better investment than Sergey Brin buying and modifying a 747 jet aircraft for his personal use.
The small market cap in the gold and silver sector is one to drool over, isn’t it?