Amidst the recent plunge in gold prices,
have shown a huge disparity in performance-some gold ETFs have
declined as much as 20 percent, while others have escaped nearly
The differences in performance can be attributed to the method
through which each fund gains exposure to gold. That exposure can
be broadly grouped into three categories:gold miner equities;
futures-based strategies; and physical funds.
Gold miners are one way to gain exposure to gold-linked
equities; these ETFs invest in the common stock of gold mining
companies. In theory, this is a legitimate way to gain exposure to
gold; after all, if the miners control new supply on the market,
then they ought to be able to leverage increases in gold prices
which, in turn, ought to boost their bottom line.
The problem with gold miners, however, was best presented by
hedge fund titan John Burbank as an analogy:Investing in gold
miners is like using a winning lottery ticket to buy more lottery
The analogy isn't perfect but the point is clear:In the long
run, the share price of equity miners will not keep pace with
increases in the price of gold.
Investors can also choose to get gold exposure through
futures-based gold ETFs, which are portfolios that buy futures
contracts on gold. By purchasing a futures-based gold ETF, you own
a portion of the right to buy gold in the future at a predetermined
These ETFs systematically roll from one futures contract into
another as the contract approaches maturity. Contract selection
methods vary from fund to fund, but the essence is the same.
The argument for futures-based strategies is primarily one of
cost:Physically backed ETFs-which I'll turn to momentarily-incur
the costs of storing, protecting and counting gold. As you can
imagine, those costs aren't menial, but whether or not futures
strategies are actually more cost-effective than physically backed
portfolios is debatable.
The last category of gold ETFs includes funds that buy and store
physical gold. This option appeals to many investors because of its
simplicity and security.
One of the most popular reasons people choose to invest in gold
is as a hedge against some form of a global economic collapse. In
that sense, many seem to feel reassured that if the world comes
crumbling down, they at least have gold stored in vaults in London,
New York or Singapore.
Now, these different approaches certainly fared very differently
in the recent gold downturn, as the table below shows.
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