How Various Gold ETFs Stack up Against the Price of Gold Itself

by ETF Base on May 5, 2010

With Greece burning (literally) and the Euro zone under increasing pressure, volatility is spiking and investors are looking for alternatives to traditional equities.  With every major government debasing their currency, it’s tough to find a particularly attractive currency at all (some cite Canada and Australia as being a bit more responsible, but no guarantees there).  Therefore, the next best thing is the only true global currency – gold.  While I’ve often struggled with why investors have bid up this otherwise practically useless metal, human behavior can’t be ignored – when panic sets in and questions over the true value of fiat currencies arise, gold spikes.  As such, it’s worthwhile considering which gold investments are best, as there are many – with different underlying holdings, tax implications and more.  Today, we’ll compare the gold bullion ETF (GDX) with two gold miner ETFs:

Gold ETF (physical gold bullion) Summary:
Issuing Company: SPDR
Ticker: GLD
Expense Ratio: 0.4%
Prior 3 Month Return: Up 10%

Gold ETF (mining and exploration) Summary:
Issuing Company: Market Vectors
Ticker: GDX
Expense Ratio: 0.55%
Prior 3 Month Return: Up 16%

Gold ETF (Gold Juniors Miners) Summary:
Issuing Company: Market Vectors
Ticker: GDXJ
Expense Ratio: 0.6%
Prior 3 Month Return: Up 20%

Gold Miner ETF Returns Leveraged to Gold

As you can see, in the recent past, the returns of mining company ETFs have outperformed gold itself.  Likewise, in the downturns, GDXJ especially, drops more.  So, without pursuing a daily leveraged ETF like (UGL) specifically given the downsides of holding these for prolonged periods, over longer periods of time, investors could reasonably expect stronger performance from GDX and GDXJ when gold is rising.  There’s a bit of a dual benefit here in that not only are the profits of these companies tied to the spot price of gold, but with most of them reporting profits in terms of US dollars, if the dollar crashes in terms of other currencies at some point in the future (it’s not now because Europe’s in even worse shape than the US), there’s an added boost to profits (and hence, share price) in terms of US Dollars.  Conversely, these companies are subject to operational risk, so if for instance, Congress decides to levy a new “windfall tax” on “those greedy mining companies” like they bat about for the big oils each time oil spikes, well, the mining ETFs would suffer while GLD would presumably continue unchanged.

Disclosure: Author is long GDXJ in conjunction with a paired short strategy on leveraged precious metals ETFs.

{ 0 comments… add one now }

Leave a Comment

Previous post:

Next post: