Gold Bullion versus Gold Producers

In a previous post, Are Gold Stocks Cheap, I looked at two of the world’s leading gold producers Barrick (ABX) and Goldcorp Inc (G).  Both of these companies trade on the TSX and are the world’s leading gold producers. In that post I examined that the price of gold bullion and the share value of gold producers are not always correlated. In fact, the price of gold producers and the price of gold are currently inversely correlated (see chart below). I covered a couple of the possible reasons why in that post. While gold producers may be a bargain at these price levels, it does not necessarily mean that they are a replacement for buying the metal itself. In other words, gold bullion and gold producers have become very different types of investments. But it wasn’t always that way. In times of economic uncertainty investors bought the shares of gold producers as well as gold bullion.

abx-vs-gold-2-year

ABX versus SPDR GLD ETF (2 year chart)

When you buy a gold producer such as Barrick or Goldcorp Inc. you are not investing in the price of bullion. You are investing in a mining company which is also a gold producer. Barrick and Goldcorp are $39 billion and $32 billion dollar companies. They have established global operations, are top constituents of the TSX Composite Index, and pay a dividend to investors. These may not be generous dividends at 1.3% yield for Goldcorp, and 2.3% yield for Barrick, however Barrick has raised its dividend every year. As with lower yield stocks in general, there is also more potential for capital growth.  But with all the recent economic uncertainty in Europe and declining global markets, investors are not buying the gold producers – they are buying the bullion.

One reason investors haven’t been flocking to the gold producers, is the array of other options available to them. Investments in gold now extend far beyond buying the gold producers, to various ETFs, mutual and managed funds, or even buying the bullion itself. Investors also feel that there is more price stability with buying gold bullion as opposed to buying a gold producer with its swings in share price, management or profit and production uncertainties.  Case in point, Barrick Gold’s recent board decision this month to oust its CEO Aaron Regent. This was a big shock to investors and the market, since the same board gave him a glowing review only a few months earlier.

In a recent Globe and Mail article, buy bullion, not gold stocks, Canadian hedge fund manager Albert Friedberg believes most investors are far better off holding gold bullion than the shares of gold producers. The article also points to the shift of institutional investors, who now prefer to trade bullion-linked ETFs. For the small investor ETFs make sense. For the price of a mere trading commission, an investor can purchase gold bullion ETF such as iShares Gold Bullion Fund (CGL). There is no need for an investor to take physical possession of the gold, deal with spreads on the bullion price, or deal with fund performance and management fees etc.

How you play the gold bullion card, is really dependent on your investment objectives. If you simply want to play the swings (which is not investing), or have the most liquidity with your investment, a gold bullion ETF is the way to go. If you are hedging your portfolio against a catastrophic banking failure, then you would want to buy the bullion directly.

Readers, what’s your take? Investing in gold producers or gold bullion?

This post was written on behalf of Hinde Capital.

5 Responses to “Gold Bullion versus Gold Producers”

  1. Hey Ninja!

    Gold has always been interesting but it’s like speculating for me. It falls in the category of currency trading to some extent. I don’t have enough knowledge or exposure to what moves the needle in those areas. More importantly, gold mining tends to be in countries where geo-political events are not in the political control I am familiar with.

    I’ll stick to my utilities and banks for now :)

    Reply to this comment
  2. Michel

    Jun 13. 2012

    I have bought the individual major gold mining companies. In the gold index (US or Cdn ETFs) I find too many small underachieving stocks. And, I do not like the pure gold ETF because you can never be sure that you actually own the gold itself, as it was re-affirmed yesterday on BNN by Mr. Goodman.

    Reply to this comment
    • The Dividend Ninja

      Jun 13. 2012

      Hi Michel,

      I agree with you, buying the big gold producers like Barrick and Goldcorp is the way to go! :) And while iShares CGL and other ETFs may back their value with bullion, it really isn’t a gaurantee. You will need gold coins to buy bread when everythign falls apart. ;)

      Kidding aside, what I found interesting over the last few years is how the price of bullion and gold producers have diverged. People used to buy the gold producers as well in times of uncertainty. Now they are completely different investments.

      Cheers

      Reply to this comment
  3. Salvador Navarro

    Jul 31. 2012

    Thank you for the information. I enjoyed spending some time reading it and learn a few good things from it. I’ll bookmark this site to visit again from time to time.

    It’s hard to find a site that tackles this topic as deep as this – and for that, I appreciate the effort you are putting into this.

    Keep up the good work!

    Reply to this comment

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