Which is a Better Bet: Gold Stocks Or Gold ETFs?
Gold is viewed as a safe haven asset for investment purposes as it is used as a hedge against global geopolitical uncertainty. A direct relationship exists between gold prices and global instability as investors resort to gold when the global environment becomes unpredictable. Exposure to gold for investment purposes could be gained via various mediums such as through purchase of physical gold, investing in stocks of gold mining companies, or by purchasing gold mutual funds or gold Exchange-Traded Funds (ETFs).
Gold ETFs are traded on global stock exchanges similar to stocks of gold mining companies. These assets have been gaining popularity in the market on the ground that they offer a large degree of liquidity and transparency to their investors. This benefit is otherwise not available when physical gold is purchased. However, there remains a significant drawback in terms of the return on investment in this mode of investment when compared to traditional gold stocks.
Gold is a non-yielding asset and does not provide additional returns to investors other than capital appreciation. Gold ETFs invests in physical gold and hence share similar characteristics of return as that of gold. The stock price of ETFs appreciate/ depreciate as per the demand-supply dynamics of gold. The investors at the time of liquidating their position receive their return in the form of capital appreciation of their stock prices. On the other hand, however, stocks of gold mining companies are globally listed companies whose major source of revenue is delivery of physical gold. Although the share price of these companies would be proportional to gold prices in general, these companies aim at achieving higher shareholder value through improved operational efficiencies and by reducing cost. They intend to remain a favorable investment option to their investors by delivering high returns in the form of both capital gains, as well as in the form of steady dividends.
Thus, the return of gold mining companies are not explicitly dependent on gold prices. Major gold mining companies such as Barrick Gold (NYSE:ABX) and Newmont Mining (NYSE:NEM) have maintained their high dividend policy even though gold prices have remained volatile. They have done so through their cost reduction initiatives which have helped them maintain their high cash flow position and deliver higher dividends to their shareholders.
The below chart depicts the dividend history of Barrick Gold and Newmont Mining over the past one year in comparison to the movement in gold prices. You can view our base case for the dividend yield for Barrick and Newmont here and create different scenarios using our interactive platform. Dividend yields have remained a priority for these companies and have been on an increasing trajectory as presented below.
The long term objective of these companies is to maintain a high dividend policy in order to make their stock more attractive than gold ETFs. Consequently, these companies are selectively investing in projects that would significantly lower their cost and hence maintain their revenue even if gold prices fall. This factor makes the stock of these companies more attractive than gold ETFs which otherwise are a favorable medium to gain exposure to gold.
Have more questions about Newmont Mining and Barrick Gold? See the links below.
- How Newmont Mining’s Strong Cash Flow Position Is an Advantage for the Company
- Barrick Gold Earnings Review: Tension in Tanzania Hits Earnings
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