Date: 10‑02‑2020
Source: The Wall Street Journal
Bullion has many advantages for long‑term investors, experts say. But for those who want to bet on the current rally, gold‑mining stocks may be preferable
Gold is a store of value. But one downside of bullion is that it pays no dividend.
After years stuck in the doldrums, gold is back in fashion. A common question from individual investors is, should they put their money into the precious metal itself or gold‑mining stocks?
“It boils down to what you are trying to achieve” says Rohit Savant, vice president of research at New York commodities consulting firm CPM Group.
For those seeking a strategic, long‑term investment, Mr. Savant and other experts advise buying bullion—that is, bars or coins of the metal or funds that focus on such. For those seeking to make a tactical bet on the gold rally, shares of gold miners might be preferable in that they offer the potential for bigger gains over a shorter period. Either way, investors should brace for a wild ride.
For much of the past decade, gold and gold‑company shares weren’t great investments. The price of the precious metal briefly peaked above $1,900 a troy ounce in September 2011. By late 2015, it had fallen to $1,060 an ounce, a low for the decade.
“If you look at the price of gold over that time, it was in purgatory,” says Art Hogan, chief market strategist at National Securities.
Gold stocks fared even worse. For much of the same period, VanEck Vectors Gold Miners (GDX) exchange‑traded fund, which tracks a basket of gold‑mining stocks, traded at less than half the value it was in late August 2011, according to data from Yahoo Finance.
Then suddenly, gold caught the interest of investors, as the U.S.‑China trade war dimmed the outlook for stocks and the some feared the White House wanted a weaker U.S. dollar. Bullion prices have rallied around 30% from September 2018, and the metal was recently trading at around $1,600 an ounce. Gold‑mining stocks have jumped almost 60% over a similar period. Wolfe Research now sees gold prices breaching the record highs of 2011, perhaps this year.
Pros, cons of bullion
For long‑term investors, investing in gold bullion has many advantages. It is a diversifier of risk when held as part of a broader portfolio. That’s because gold has virtually no correlation to movements in stocks most of the time, according to a research paper published in the Journal of Managerial Finance in 2015.
“The maximum correlation was less than 0.3, and that’s not a lot of correlation compared with other securities and their relationship to the S&P 500,” says Allen Michel, professor of finance at Boston University Questrom School of Business, one of the authors of the paper.
Another reason investors might want to hold a portion of their wealth in gold is as a store of value over the long term, Mr. Savant says. In other words, over long periods, gold prices move up as costs of living rise. That was certainly true during the double‑digit inflation of the 1970s, when bullion prices jumped more than 20‑fold to a then‑record $850 in 1980 from $35 in 1971. “The 1970s was a great decade for gold and terrible for stocks,” Mr. Hogan says.
Some experts also say bullion could help investors if there is a financial crisis and deflation. When a financial crisis hits, central banks may have no choice but to lower the cost of borrowing far below zero, says Don Coxe, chairman of Chicago‑based Coxe Advisors. That will make gold bullion even more attractive relative to negative‑yielding bonds because of its long history of maintaining its purchasing power.
The downside of bullion is that it never pays a dividend, and there are generally charges for insurance and storage in vaults, which can bite into profits. ETFs have helped reduced that burden, making small investments viable. “The storage costs have been mitigated by ETFs, which somewhat distribute the cost among the investor pool,” Mr. Savant says.
There are plenty of bullion ETFs from which to choose, including SPDR Gold Shares (GLD), the largest, with more than $45 billion in assets. Others include GraniteShares Gold Trust (BAR) and VanEck Merk Gold Trust (OUNZ).
Pros, cons of gold stocks
As the past decade shows, gold‑mining stocks are far more volatile than gold prices. From 2011 to 2018, gold‑mining stocks fell around twice as much as gold stocks on a percentage basis. On the way back up over the past year or so, gold miners outperformed bullion handsomely.
“Investing in the miners is a bet you will have a sustained rally in the gold price,” says Mr. Hogan. If bullion continues to rally, then gold‑mining stocks should continue to do even better. But if the rally in bullion stalls even temporarily or reverses, then miners might not be such a good risk compared with bullion.
Nevertheless, gold stocks and ETFs that focus on them—such as VanEck Vectors Gold Miners, as well as iShares MSCI Global Gold Miners (RING) and Sprott Gold Miners (SGDM)—do seem to offer diversification in the same way as bullion.
“There’s good reason to believe that gold‑mining stocks follow a similar pattern to gold” in that way, says Prof. Michel.
That said, “there are a lot of additional risks you take on when you buy the miners,” Mr. Savant says.
Notably, when gold‑industry assets are cheap, financing might not be easily available. All mining companies must continually replenish their resources by finding new mineral deposits. And worst of all, mining CEOs can get overly optimistic when the industry booms.
“You always have that history of gold miners spending too much money at the wrong time,” says Mr. Hogan.
