Gold miners vs Gold ETF: which has done best?

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The Ninety One fund has produced returns that have been both lower and more volatile in that time. It remains significantly below its level from a year ago despite the record highs gold has reached.

To understand why requires some insight into what moves the price of gold mining shares. Gold prices are certainly one factor - a rise will automatically boost the earnings of the gold miners. In fact, a rise in the gold price tends to have an amplified effect on the profits of gold miners. That’s because miners have significant fixed costs, so any rise in the price they can sell their gold for equates to a larger percentage rise in their earnings.

Consider this simplified example. A miner produces $100 worth of gold by expending costs of $50 - leaving a profit of $50. If there is a 50% rise in gold prices, the amount it can sell the metal it produces rises to $150 - leaving $100 profit after its costs have been deducted. Therefore a 50% rise in the price of gold equates to a 100% rise in its profits.

That mathematical effect is often the reason investors are persuaded to invest in miners rather than gold itself. So why hasn’t it worked recently, when the price of gold has risen?

The answer is that any boost from the higher gold price has been outweighed by other factors adversely affecting miners. The widespread inflation we have experienced since 2021 has driven miners’ operational costs higher, eroding profits in the process. Higher interest rates have made borrowing costs more expensive as well.

The increased focus on ESG (environmental, social and governance) concerns may also have made it harder for miners to secure capital investment. Stiffer regulations can raise costs for miners who often operate in parts of the world where standards of governance and transparency are lower.

Another factor has been higher demand for physical gold among central banks, which has not extended to shares in gold miners.

All these things have caused divergence in the performance of gold miners versus physical gold. Figures produced by analysts VettaFi in November last year showed that the correlation between gold miner performance and physical gold had fallen, from 0.8 to 0.6 (where a reading of 1 equals perfect correlation and 0 equals zero correlation).¹

Does that mean that those gaining exposure to gold via gold miners should change tack? Not necessarily. When we look over longer time periods we can see that there have been periods when the miners have done best. The chart below shows the performance of the Ninety One Global Gold fund versus the iShares Physical Gold ETC over ten years.

It shows that the Ninety One fund has been more volatile but has also produced periods of much stronger returns that physical gold. Many of the factors adversely affecting gold miners now can be reversed in the future if you are willing and able to wait for a turnaround, although there is no guarantee of that.

As always, it’s vital to understand what you are invested in and how your investments may behave.

More on Ninety One Global Gold Fund

More on iShares Physical Gold ETC

Past performance is not a reliable indicator of future returns.

Source: Morningstar, 31.12.18 to 31.12.23.

Source:

¹ VettaFi, 7 November 2023