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Gold has been setting new records almost daily. The price of the precious metal recently hit US$2,398, an all-time high. This comes as a bit of a surprise. Gold had been trending higher for the past year, but few investors have been buying into the rise. Gold futures were trading one year ago at US$1,970. At the current price, they’ve gained 20% over the past 12.
What’s happened? Several factors are contributing to the price jump. They include:
Gold’s safe haven status. Wars in Ukraine and the Middle East threaten to escalate. Iran continues to attack Israel either directly or through regional proxies, and Israel continues to defend itself with counter-strikes, including targeting Hamas leaders and Hezbollah positions in Lebanon. Commercial shipping in the Red Sea continues to come under attack from Houthi rebels, despite raids by the U.S. and Britain on launch sites. Gold has traditionally been a refuge in such turbulent times.
Central banks are buying. Asian central banks are adding to their gold reserves, reducing dependence on the U.S. dollar. This puts upward pressure on the gold price.
Donald Trump. There is speculation that some buyers are stocking up on gold as a hedge against a Trump election win in November, which has the potential to lead to major disruptions in global trade and defense alliances.
Lower interest rates. This is the primary driver. The Federal Reserve Board has signalled it will cut interest rates by a quarter point at least three times this year, beginning in the summer. Lower rates tend to weaken the U.S. dollar, which in turn drives up the gold price. About 70% of U.S. investors now expect the rate cuts to start in June.
You’d think that rising gold prices would be reflected in the shares of mining companies. However, that’s not happening. The TSX Global Gold Index, which tracks shares of gold miners, gained only 2.44% in 2023, and most of the major gold mining stocks were either in negative territory or ended with low single-digit returns.
So far this year, the Global Gold Index is down 2.27% (to March 13). Barrick Gold (TSX: ABX) is down 4.8%, and B2Gold Corp. (TSX: BTO) is off 16.5%. There are exceptions: Iamgold Corp. (TSX: IMG) has gained almost 51% year-to-date. But big winners are few and far between. Most of the mining stocks are in the red or showing low single-digit profits.
John Hathaway, Managing Partner at Sprott Inc. and Senior Portfolio Manager at Sprott Asset Management USA calls it “the greatest disconnect I’ve ever seen” in his 25 years tracking the metal.
In an on-line interview with Charlotte McLeod of investingnews.com, he blamed the phenomenon partly on crypto, which he said “has certainly taken some of the air out of the room for gold mining stocks.”
But the major challenge, he said, is the popularity of passive investing, specifically in gold ETFs that track the physical metal.
“It's fair to say that the gold-backed ETFs have cannibalized demand for gold mining equities,” Mr. Hathaway said. His advice to the miners? Buy back their cheap stocks rather than make risky bets on new mine start-ups.
In this situation, the best way for investors to get in on the gold action is to focus on the metal itself. An easy way to take a position is to buy units in the SPDR Gold Shares ETF (NYSE: GLD), which was trading at US$200.34 at the time of writing. It’s the largest physically backed gold ETF in the world, and accurately tracks the movement of the underlying metal.
The fund was launched by State Street Global Advisors in 2004 and has an expense ratio of 0.4%. That seems to be on the high side for an ETF that requires no active management, but there are costs involved in owning the gold that backs up the units, including storage and insurance. The fund has over US$56 billion in assets under management.
As a long-term hold, the fund has generated an average annual compound rate of return of 8.2% since inception (to March 31). Year-to-date, it’s ahead 7.3%. The fund does not pay any distributions.
There are several other physical gold ETFs, including some based in Canada, like the iShares Gold Bullion ETF (TSX: CGL). All have similar characteristics.
Yes, you will be contributing to the cannibalization of the mining stocks by doing this. But until the market shifts position, physical gold ETFs are best option if you want to ride the trend.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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