Gold prices broke to multi-year highs over the summer of 2019 and have continued to rise with momentum. For the average investor, however, investing in the yellow metal is not all that straight forward.
On our website, we publish news articles that often reference the price of spot gold or gold futures. But these instruments aren’t always available with some of the common brokers that focus on the equities markets.
Take spot gold for example. The ticker symbol is XAUUSD and this is the most common reference for the spot price of gold. Most brokers that specialize in forex trading will have this instrument available to their customers. XAUUSD allows traders to employ significant leverage which may not always be a good thing.
In a similar fashion, leverage can be used by trading futures contracts. For the average investor, this is a complicated way of getting exposure to the yellow metal. Most brokers will require additional paperwork to enable futures trading, if they even offer it.
Futures contracts expire, usually on a monthly basis. This means that when the contract expires, you have to ‘roll-over’ your investment. This involves selling the contract you’re in and buying a contract with an expiry a bit further out. If you’re not used to trading futures, it doesn’t make much sense to go this route.
A better avenue is to invest in ETF’s and the most popular gold ETF is SPDR gold shares (GLD) which is part of the SPDR family of ETFs. This group is known to produce sector ETF’s. It’s most popular product is an ETF that tracks the S&P 500 (SPY).
SPDR Gold shares originally traded on the New York Stock Exchange before moving over to NYSE ARCA in 2007 where it has traded since. The ETF is the largest physically-backed gold ETF in the world. As of August last year, there were about 288 million shares outstanding.
Investing in Gold Mining Stocks
Gold mining stocks are investments into companies that are actively exploring for gold. This is further divided into majors and junior gold mining stocks.
Major gold miners have been in the business for a lengthy period of time and often have global operations. Junior miners, on the other hand, tend to be a bit newer and mostly run smaller operations.
There are many gold mining stocks out there. While they all do carry some correlation with each other, there are a couple that certainly outperform.
Investing in gold mining stocks can be more risky and speculative compared to investing in spot gold or an ETF that tracks spot gold. A good alternative to mitigate some of that risk is to invest in an ETF that holds a basket of gold mining stocks.
Two popular options are GDX and GDXJ. The former is the VanEck Vectors Gold Miners ETF which tracks the major gold mining companies. It’s current top three holdings are Newmont Corp (NEM), Barrick Gold (GOLD), and Franco-Nevada (FNV).
GDXJ is the junior miners equivalent to GDX. Its current top three holdings are Kinross Gold (KGC), Gold Fields (GFI), and Evolution Mining (EVN).
On a volatility adjusted basis, gold mining stocks have underperformed as GDX only broke above its 2016 high in April 2020 while spot gold broke above the equivalent high in June 2019.
At the same time, the breakout in April sends a strong technical signal for more upside in gold mining stocks which suggests gold prices, in general, have more upside considering the long-standing correlations.