Gold mining stocks have been in the headlines lately as their share prices have moved significantly higher.
Between early March and mid-May the Market Vectors Gold Miners ETF (GDX) increased over 17%. The Market Vectors Junior Gold Miners ETF (GDXJ), which tracks smaller-capitalization miners, ticked up over 25% in the same period. Both funds' result dwarfed the underlying metal's return of roughly 6.4% during that time.
Historically, advisors and fund investors have used gold miners as one of the few ways to get exposure to the precious metal, says John Gabriel, ETF strategist with Chicago-based Morningstar. That's changed over the past 10 years or so with the arrival of physical-gold ETFs, which provide direct exposure to the commodity's price movement.
Client Motivations
As a result of this development, advisors and investors can allocate funds to gold in three distinct ways: by buying the physical metal, by purchasing ETFs (or ETNs) that hold the metal and by acquiring mining stocks. The methods aren't directly interchangeable, however, Gabriel says, and the client's investment goal plays a critical role in deciding with path to take.
Commodity holdings are often used as a hedge against inflation, general macroeconomic risk or currency devaluation. Investing for these reasons usually lead to longer-term positions.
"For the most part, when you look at the gold bullion and advisors who use it in portfolios, it's a strategic long-term position," he explained. "But, on the other hand with the gold miners, that's almost a speculative play. You know, they historically have been poor asset allocators and poor performers. That's not to say they can't go through periods of good performance, but that makes it more of a tactical play vs. the strategic holding in gold."
An investor's ability to tolerate volatility is another factor for advisors to consider, and owning mining stocks can be a roller-coaster ride.
Gabriel cites the past year's returns for the SPDR Gold Shares (GLD) and Market Vectors Gold Miners ETF. The standard deviation of GLD's returns was about 12%, while GDX came in at 45%. Even on a three- to five-year basis, he adds, the GDX standard deviation is more than double GLD's.
Dual-Market Participation
The New York-based Tocqueville Gold Fund (TGLDX) participates in both markets. As of mid-May, just over 12% of the fund's $1.1 billion in assets was invested in physical gold.
John Hathaway, CFA and co-manager of the fund, compares the gold holdings to an anchor that also provides flexibility. If he believes mining shares are expensive, he can invest new money flows into the metal.
