Gold Mining Stocks vs. Gold ETFs

October 2nd, 2015 by

As most precious metals stackers know, there’s a distinctive difference between owning physical gold and owning shares of gold securities (“paper gold”) or gold mining companies. Neither gold mining stocks nor gold-backed funds are quite the same as holding physical metal, but both offer an alternative means of exposure to the gold market.

paper-gold

These two types of paper gold investments, however, do not necessarily track exactly together. For one, they cater to somewhat different kinds of investors: those who buy gold miners are usually more attuned to the actual industry dynamics, while those who choose gold ETFs are more likely to be interested in a quick and easy way to hedge their portfolios with gold. (These are only generalizations, of course.)

Secondly, where mining stocks tend to trade largely in lockstep with actual spot prices, exchange-traded funds may not. There’s a lot more than just the value of the metal that goes into the operations and overall performance for gold miners, of course, but this has persistently been the case during the current commodities slump.

Comparing Mining Companies and ETFs

Mineweb has a fascinating overview of the recent performance of these two different types of investments, so it’s worth taking a look at what the difference between them really is.

Remember that both are simply proxies for the gold market, and offer some exposure to movements in the gold price without requiring the delivery and storage of actual metal.

Charting-Gold-Market

Broadly, Mineweb’s analysis reveals that the mining companies (both in gold and platinum) have been hit harder than their ETF counterparts. Where major platinum miners like Amplats (JSE:AMS) and Impala (JSE:IMP) have struggled, ETFs that track platinum have been far more steady, only falling slightly during the preceding 52 weeks. Similarly, gold ETFs have actually risen over the course of the year while mining companies such as Sibanye Gold (NYSE:SBGL; JSE:SGL) and Harmony Gold (NYSE:HMY) have lost 25% and 60% over that time, respectively.

The reason for this disparity is because mining stocks are more directly connected to the ups and downs of commodity prices, while ETFs are specifically designed to be more consistent and resist such swings. ETFs are, in a word, diversified. This means that such funds also probably won’t gain as much during periods where the market rises, where mining stocks likely will.

Young Man Prefering Gold Bar to CashTake-Aways

Essentially, one can conclude that mining stocks are more attractive for investors with high risk tolerance, as these shares offer more direct exposure to where actual metal prices are going. ETFs tied to precious metals, on the other hand, are probably better for the diversification-oriented individual who wants only limited exposure to gold, or may want greater flexibility to jump in or out of a position.

Still, it’s good to always keep in mind that there’s no replacement for actually holding physical gold!

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.