I’m not a big fan of precious metals ETFs. They follow bullion prices, and investors pay a fee for holding the ETF. The only return for an investor is the potential rise in precious metals prices. Conversely, bullion miners or streaming and royalty companies offer, in some cases, a dividend payment. These companies’ value could appreciate not only due to elevated bullion prices, but also on account of higher production or volume of metals sold (with new contracts or mines). Nonetheless, I think it’s high time for me to get off my high horse and examine some of the advantages of holding gold ETFs over other precious metals investments including bullion miners and streaming and royalty companies. So let’s review some of the advantages of holding SPDR Gold (GLD) for investors seeking to go long on gold over bullion companies.
The SPDR Gold ETF follows the price of gold by hoarding gold, which, unlike, other leading commodities that purchase short term futures (next month). These derivatives also tend to cause problems such as roll decay due to changes in the pricing of the options attributed to Contango/Backwardation shifts.
Source of data: GLD’s website
Exposure to one metal and not several
GLD holds only the yellow metal, which is ideal for investors, who only seek to have exposures to gold. Conversely, precious metals companies tend to sell other metals besides gold such as silver and copper. E.g. 75% of Pan American Silver’s (PAAS) operations are silver, the rest come from gold. Goldcorp (GG) sells gold, silver, lead and zinc.
Management decisions – don’t always pay off
Since the ETF only holds gold, the decisions its management takes have little to do with the ETF’s performance. But the decisions a bullion company takes could, in some cases, raise the company’s risk or don’t play out. This includes taking a poor decision or entering an agreement, which, over time, won’t payoff. This is true not only to precious metals producers but also to royalty and streaming companies. Silver Wheaton (SLW) entered into several streaming agreements in the past few years, when gold and silver prices were very high. Since then precious metals prices tumbled down; this turn of events raise the question of whether its deals in those years will have a positive ROI, if the current bullion prices will remain at these levels.
Delays and higher capital costs
For bullion producers another risk factor is the potential delays in production and higher than anticipated capital costs they may face. As an example, Barrick Gold (ABX) incurred, this year, $300 million in environmental costs related to its Pascua-Lama mine, which is located on the border of Chile and Argentina. The company suspended the construction of the mine at the end of last year. These delays and additional costs will drive down the NPV of this project for Barrick Gold and adversely impacted the company’s stock. These types of risks, holders of gold ETFs don’t have to face.
I tried to provide another perspective for investors looking into precious metals ETFs such as GLD. These are some of the risks holders of the ETF don’t have to face as oppose to holders of bullion companies. Despite these advantages, I remain skeptical about holding GLD even if you believe gold were to rally in the future. I just think there are other options for investors out there.
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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.