ETFs or mining stocks: conditions are perfect for investing in gold

The conditions are perfect for investing in gold and experts are united in calling it a ‘buy’. Here’s how to get started.

There are many ways to invest in the yellow metal ‘safe haven’. Picture: AFP

The “Trump Dump” – or is it “Trump Slump”? – has undeniably revived investor interest in safe haven gold.

At present the gold price is trading near $US3200: Goldman Sachs has a target of $US3700 by the end of the year and many analysts have considerably higher targets.

My personal preference is to have exposure to the metal rather than through gold producers and explorers, as history time and again reveals this is the lower risk option.

Apart from specific currency risks (AUD versus USD) and moves in the all-important bond markets, gold bullion or Exchange Traded Funds covering gold bullion carry no company-specific risks.

And if you know the gold sector those “company specific risks” have thrown up plenty of risks for gold miners on the ground!

The basic proposition is as follows: if you invest in gold stocks rather than in gold or a gold derivative, your reward can be significantly higher in the good times and significantly lower in the not-so-great times.

In other words, when it comes to the “yellow metal” you have to know your own risk appetite, strategy and investment horizon.

The underlying trend for gold priced in USD continues to be pointing upwards and analysts have been upgrading their lagging forecasts, with expectations for ongoing gains building out across the months ahead.

Note, however, that share prices for gold producers generally are implying a lower price for bullion, i.e. they are trading at a discount against the metal.

You know investor interest is on the rise when a recent outlook report by analysts at Citi carries the title “A once in a 40-year gift for gold producers”.

So it’s clear there is a valid logic to add exposure to portfolios.

The FNArena-Vested Equities All-Weather Model Portfolio habitually owns an allocation to gold – as insurance for when calamity arrives.

Back in 2020 when the global pandemic caused economies to lock down, the portfolio’s allocation exceeded 10 per cent (in addition to a rather large cash holding).

Today’s allocation is around 7 per cent, and that includes a recent top-up as global risks were on the rise since “Trumpty Dumpty” was hellbent on starting a trade war with just about everyone outside of Russia.

So let’s start with gold, the metal.

Gold bullion funds are mostly ETFs backed by physical gold, allowing investors to track the price of gold directly. Picture: ABC Bullion

Probably the easiest way to add exposure is through ETFs listed on the ASX.

These ETFs provide exposure to either physical gold or gold mining companies, offering diversification and convenience without the need to store physical bullion.

Here’s a guide:

Gold bullion funds

These are mostly ETFs backed by physical gold, allowing investors to track the price of gold directly.

Perth Mint Gold (ASX: PMGOLD)

● Backed by gold bullion stored at the Perth Mint, with a government guarantee from Western Australia.

● One of the lowest-cost options with a management fee of 0.15 per cent.

● Assets under management: $1.35bn.

● Can be converted into physical bullion through a Perth Mint Depository account.

Global X Physical Gold (ASX: GOLD)

● Backed by physical gold stored in a London vault by JPMorgan Chase.

● Unhedged, meaning returns can be influenced by currency fluctuations between the Australian dollar and US dollar.

● Management fee: 0.40 per cent.

● Assets under management: $4.48bn.

BetaShares Gold Bullion ETF Currency Hedged (ASX: QAU)

● Backed by physical gold stored in London but hedged to minimise currency risk between AUD and USD.

● Management fee: 0.59 per cent.

● Assets under management: $944m.

VanEck Gold Bullion ETF (ASX: NUGG)

● Backed by physical gold sourced exclusively from Australian producers and stored at the Perth Mint.

● Unhedged, with a management fee of 0.25 per cent.

Global X Gold Bullion (Currency Hedged) ETF (ASX: GHLD)

● Tracks the spot price of gold while hedging against AUD/USD currency movements.

● Management fee: 0.35 per cent.

Gold mining ETFs

These ETFs invest in companies involved in gold mining and production, offering indirect exposure to the gold market.

VanEck Gold Miners ETF (ASX: GDX)

● Provides exposure to global gold miners, including companies such as Newmont and Barrick Gold, with some Australian holdings (~11 per cent).

● Management fee: 0.53 per cent.

BetaShares Global Gold Miners ETF (ASX: MNRS)

● Tracks an index of global gold mining companies, with a focus on firms outside Australia (~50 per cent Canadian);

● Currency-hedged and provides semi-annual distributions.

● Management fee: 0.57 per cent.

The rewards from successfully picking the right gold miner to invest in can be many times greater than through a risk-limiting ETF. Picture: AFP

ASX-listed gold miners

But what if you’d like to pick a specific gold miner? The rewards from successful stock-picking can be many times over more rewarding than through owning a risk-limiting ETF.

Stockbrokers have updated their thoughts and favourites recently. Below is a bird eye’s view from a sample of recent sector updates.

Analysts at Canaccord Genuity also remind investors that there’s an M&A wave heating up, and it includes the local gold miners with Gold Road (GOR), Spartan Resources (SPR) and De Grey Mining (DEG) all receiving a knock on the door from suitors these past number of weeks.

Canaccord thinks more deals will be announced, since strong cash flows are strengthening balance sheets across the sector globally.

Similar to just about everyone else, Canaccord has upgraded its gold price forecast to US$3447/oz (for now).

In addition, its rating for Catalyst Metals (CYL) was downgraded to Hold from Buy in response to a fierce share price rally, while Capricorn Metals (CMM) was upgraded to Buy from Hold.

Canaccord’s latest sector update identifies the following “preferred exposures”: Northern Star; Genesis Minerals; Perseus Mining; Ramelius Resources; West African Resources; Westgold Resources; Andean Silver; Predictive Discovery; and Strickland Metals

Analysts at Goldman Sachs recently upgraded Capricorn Metals to Buy, while still liking Newmont Corp (NEM) and Northern Star among the larger caps, and Gold Road (upgraded to Buy) and Bellevue Gold in the smaller segment. Goldman Sachs does not like Regis Resources and rates this stock a Sell.

Plenty of choice

Analysts at Citi prefer Evolution Mining over Northern Star, while rating Newmont Corp a Buy and nominating Genesis Metals as most preferred outside the ASX100. On Citi’s estimates, share prices in general are pricing in gold at around $US2250-2500/oz while the physical price has marched beyond $US3000.

Finally, Barrenjoey’s most preferred sector exposures are Newmont Corp, Capricorn Metals and West African Resources.

Least preferred are Regis Resources, Gold Road and Emerald Resources (EMR).

Don’t say you don’t have a lot of choice in the local market!