If the Fed decides to execute more quantitative easing, gold
prices are likely to soar. So, what should investors do?
As things stand, many investors use equities to play gold and
avoid higher taxes associated with funds structured as grantor
trusts. In total, gold miners ETFs have $10.5 billion in assets.
But are investors getting the exposure they expect?
The answer is no, and that's largely because the fund names
don't reflect what they truly hold.
So, let's start with the six gold ETFs now available:
- Market Vectors Gold Miners (NYSEArca:GDX)
- Market Vectors Junior Gold Miners (NYSEArca:GDXJ)
- Global X PURE Gold Miners (NYSEArca:GGGG)
- Global X Gold Explorers (NYSEArca:GLDX)
- PowerShares Global Gold and Precious Metals
(NasdaqGM:PSAU)
- iShares MSCI Global Gold Miners (NYSEArca:RING)
It turns out that gold equity funds often invest in silver and
other precious metals. This is partially due to the fact that most
of the gold miners ETFs currently available don't have to replicate
their index fully. In fact, only 80 percent has to be invested in
the underlying benchmark, whereas most equity funds have a 90
percent requirement.
Therefore, nongold miners infiltrate ETF portfolios, and up to
20 percent of holdings can be unrelated to the gold mining
business. For example, Market Vectors' GDX holds Silver Wheaton,
the world's largest silver-streaming company, as its fifth-largest
holding, at 5.21 percent of total assets.
GDX also has a number of smaller silver holdings, such as Pan
American Silver, First Majestic Silver, Hecla Mining, Silver
Standard and Coeur D'Alene Mines. In addition, firms that are
focused primarily on gold mining can also be engaged in the mining
of other metals, which can further dilute exposure to gold. Kaminak
Gold Corp., for example, deals in nickel and uranium as well.
Although gold and silver are often grouped together, silver is a
poor substitute for gold. Gold is primarily used as an investment
or in jewelry, whereas silver has numerous industrial applications.
According to the World Gold Council and The Silver Institute, over
50 percent of silver is used in industry compared to about 10
percent of gold.
So, the price of silver is more heavily dependent on the demand
for the products it's used in. In other words, silver is more
cyclical than gold. The correlation between gold and silver spot
prices over the past two years is 0.77, no doubt less than many
might think.
Gold Miners Vs. Physically Held
The correlation between the total return of gold equity funds
and gold spot prices is lower than expected as well. Over the past
two years, correlation between the total returns of GDX, GDXJ and
PSAU and the spot price of gold has averaged 0.74, 0.74 and 0.69,
respectively.
Unsurprisingly, physically held ETFs such as the SPDR Gold
Shares (NYSEArca:GLD), the iShares Gold Trust (NYSEArca:IAU) and
the ETFS Physical Swiss Gold ETF (NYSEArca:SGOL) have had a
correlation of 0.99 over the same time period.
The return chart below shows returns over the past two years.
Once again, equity-based funds are a poor substitute to their
physically held counterparts when it comes to matching returns on
gold spot prices.
Don't forget to check IndexUniverse.com's ETF Data
section.
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