What’s better: Paper gold or gold miners?

What’s better: Paper gold or gold miners?
  • Your paper gold options…
  • Physical gold or gold ETFs?
  • Next up: Which gold miners to buy…


What a response.

I’ll be honest: I had hoped to receive a letter or two…

But what landed in my inbox on Friday afternoon caught me off guard.

So much so that I had to enlist the help of three other people.

And that mini team…is still working through all the emails.

Don’t worry — I am reading every single one.

I am, of course, talking about what I asked you to do last week.

That was to write to me, with ‘I WANT TO KNOW’ in the subject line.

If you haven’t sent through your feedback yet, make sure you do by emailing me at letters@dailyreckoning.com.au.

Today, let’s get started with the first of many emails…

Your paper gold options…

Don’t be surprised, but the first bit of feedback I’ll tackle today is about gold!

Not buying physical gold. Instead, how gold exchange traded funds (ETFs) measure up against individual gold companies.

One reader, who I will call ‘Mr T’, wrote in asking:

Can you please enlighten us all about Gold ETFs. What are they, are they worth investing in on the ASX vs individual Gold Companies? Do they pay good yield? How are they in an environment of price increase of gold as per the last 6 weeks?Thank you.

Before I get to that, let’s run through the three most common gold ETFs on the Australian Securities Exchange (ASX).

Please note the three gold ETFs I will run through today don’t use leverage.

There are two 100% gold bullion-backed ETFs listed on the ASX:

  • BetaShares Gold Bullion ETF [ASX:QAU]
  • ETFS Metal Securities Australia Limited [ASX:GOLD]

ETFS Metal Securities Australia Limited [ASX:GOLD] has been listed on the ASX since 2003. With this ETF, one unit (share) represents about a tenth of the spot gold price.

It means that, if you buy one unit of this ETF, it will cost roughly 10% of the Aussie-dollar gold price per ounce.

For example, the physical gold spot price is trading at $1,740 an ounce. That means one unit of this ETF will be roughly $174 per unit.

If the Aussie gold spot price moves up by one dollar, the value of the ETF units will increase by 10 cents.

Then, there is the BetaShares Gold Bullion ETF [ASX:QAU], which does have a currency hedge.

This means that, while you are still using Aussie dollars to buy QAU units, the ETF tracks the US gold spot price. Basically, this gives you a ‘purer’ exposure to the USD gold spot price.

One QAU share is a hundredth of the USD gold spot price. Again, a one dollar movement in the USD gold spot price will equate to a one cent movement in QAU.

If you are looking to increase your exposure to the gold price through an ETF, these Aussie-listed ETFs, which are 100% backed by gold bullion, are a good way to do so.

The alternative is a gold ETF compiled of gold miners rather than backed by physical gold.

An alternative to a gold-backed ETF, however, is one that derives its value from gold mining stocks.

One of the more popular ones at the moment is the VanEck Vectors Gold Miners ETF [ASX:GDX].

GDX aims to replicate the NYSE Arca Gold Miners Index [GDMNTR], which in turn aims to track the performance of globally listed gold producers.

The weighting of GDX is biased towards gold mining stocks in Canada (55%), Australia (17.3%) and the US (13.9%).

The remaining 13.8% is based on gold mining companies located in South Africa, Peru, China, Monaco and the UK.

Which is better: Physical gold or gold ETFs?

Now let’s compare these three to the physical price of gold in Aussie dollars:

Gold ETFs versus Aussie dollar gold spot price

Source: Bloomberg

What we can see here is that QAU (orange line) has lagged behind the rising Aussie dollar gold price.

The reason for that?

Simple. QAU is based on the US dollar gold spot price. That doesn’t mean that QAU is underperforming or a bad investment. It simply means that QAU will only follow US dollar gold price movements.

In contrast, there is GOLD (blue line), which has moved in lock step with the Aussie dollar gold price and has increased in value.

The difference between the two is a great example of how fluctuations in the Aussie dollar — strengthening or weakening against the greenback — can greatly affect investor returns.

Then, we have GDX (red line), which has slightly outperformed the Aussie dollar gold price in the past year.

However, you’ll notice GDX is much more volatile than both gold ETFs and the physical Aussie dollar gold price.

Again, this is where it’s important to remember that GDX is based on gold miners around the world.

Essentially, GDX is a mashup of international company share prices plus various currency movements.

Not only that, the underlying basis for GDX is the world’s biggest gold mining companies.

Here, companies like Barrick Gold Corporation [NYSE:GOLD], Newmont Mining Corporation [NYSE:NEM], Newcrest Mining Limited [ASX:NCM] and Franco-Nevada Corporation [NYSE:FNV] are all major constituents of GDX.

I believe the recent surge in GDX can be attributed to the Barrick Gold-Randgold and Newmont-Goldcorp decisions to merge.

Remember, if you choose to invest in GDX, it’s essentially an easier way to gain exposure to individual gold miners.

As for individual Aussie listed gold miners? Well, that’s my bread and butter.

And I’ll cover some of those performers tomorrow.

Stay tuned,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia