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Saturday, April 13, 2024

    Gold Mining Stocks Diversification

    If you’re looking to profit from gold mining, then there are a few different ways that you can get exposure to the sector in your investment portfolio. Buying individual stocks is always an option, but there are enough of them that it can be tricky trying to figure out which ones are best suited to your particular needs.

    Meanwhile, providers of exchange-traded funds have come out with several different choices tailored toward would-be investors in gold mining. Below, we’ll take a closer look at these two main ways of investing in the sector, and then offer some thoughts on how to put together the gold mining portfolio that’s best for you.

    Why investing in gold mining stocks can be so lucrative

    Many investors who follow the gold market focus most of their attention on the price of gold bullion. As a commodity, gold prices move up and down every day based on supply and demand. In particular, it’s the major mining companies that determine available gold supply, and their production levels play a key role in establishing price trends in the gold market.

    Because the gold market is global, the price that gold miners receive for the gold they produce is largely determined by factors beyond their individual control. What a miner can work on, though, is cutting costs of production as much as possible.

    If gold prices are at $1,500 per ounce, a miner that can produce gold at a cost of $800 per ounce has a huge advantage over one that has to pay $1,200 per ounce in production costs. In fact, during periods of falling gold prices, miners with high production costs often have to face extended periods of losses.

    That can eventually cause those more marginal gold miners to go out of business, leaving only those companies with more efficient operations to continue operating.

    One thing that many gold investors like about mining companies is that their fundamental business performance isn’t always correlated to the ups and downs of the broader economy. Gold prices sometimes rise during periods of economic strain, especially when prices of financial assets start to drop and cause investors in those assets to get nervous about preserving their portfolio value.

    However, that can cut both ways, and gold miners don’t always go up as much as the rest of the stock market during times of economic prosperity. The idea, though, is that by providing some diversification, gold mining stocks can sometimes help cushion the blow from losses in other holdings during tough times for the overall market.

    Gold mining ETFs

    If you don’t want to have to worry about choosing individual stocks, then gold mining ETFs could be the best answer for you. These funds typically own many different individual gold mining stocks, combining them in ways that give their investors greater diversification than they’d get from simply purchasing a handful of those stocks on their own.

    There are two primary gold mining ETFs for investors to choose from. The larger is VanEck Vectors Gold Miners (NYSEMKT: GDX), which has more than $11 billion in assets under management.

    This ETF holds almost four dozen different gold mining stocks, ranging in size from the industry’s giants like Newmont Goldcorp (NYSE: NEM) and Barrick Gold (NYSE: GOLD) to smaller players in gold mining. In order to be considered for the ETF, a company must get at least 50% of its total revenue from gold mining and related activities.

    Because the ETF is weighted by the market capitalizations of the stocks it holds, the most important companies in the gold mining industry have the largest fraction of the fund’s assets invested in them.

    For instance, just Newmont and Barrick together make up more than 20% of the fund’s assets under management, and when you look at the top 10 stocks the ETF holds, it represents more than 60% of the ETF’s assets. Canadian mining stocks make up almost half the ETF’s portfolio, while most of the rest of the stocks are split among U.S., Australia, and South Africa mining companies.

    One thing to keep in mind with VanEck Vectors Gold Miners is that it doesn’t require the ETF to hold shares only in companies that mine gold. For example, you’ll also find among some of the top holdings of the fund companies that specialize in making gold streaming arrangements with gold mining companies.

    Gold streaming companies provide financing for mining operations in exchange for the right to buy a portion of mining output at a discounted price to the market value of the gold and other metals produced. Strictly speaking, these gold streaming companies aren’t really miners, but they rely on gold miners to a sufficient extent that the ETF’s investment objective allows the fund to invest in gold streaming stocks.

    If you want the giants of the gold mining industry, then the VanEck Vectors Gold Miners ETF matches up well with your investment objectives. However, if you prefer smaller up-and-coming players in the mining industry, then VanEck Vectors Junior Gold Miners (NYSEMKT: GDXJ) could give you more of what you’re looking for.

    This ETF, which has about $4.5 billion in assets under management, concentrates on smaller gold mining companies that have more modestly sized operations. These companies can be riskier than the well-established big names in gold mining that you’ll find in the other gold miner ETF, but the stocks that the Junior Gold Miners ETF holds also have greater potential for growth in the event that the properties that they own pay off with surprising finds.

    The Junior Gold Miners ETF has 70 stocks in its portfolio. Although it, too, is weighted by market capitalization, it doesn’t have quite the concentration among top stocks that you’ll find in the ETF’s larger gold mining company counterpart. About 45% of the ETF’s assets are allocated to Canadian gold mining companies, with Australia getting a 25% allocation and 10% going to South African miners.

    Companies with mines in the U.S. and Latin America make up most of the remainder of the fund. To be included in the portfolio for Junior Gold Miners, a stock has to get 50% of its total revenue from mining either gold or silver.

    The benefit of going with a gold mining ETF is that you don’t have to worry about picking individual stocks. However, that convenience comes at a cost. Both ETFs charge a little bit more than 0.5% in annual expenses, with those costs coming off the top from whatever return the fund’s assets generate.

    Also, the downside of using ETFs to invest in gold miners is that poor-performing mining companies can offset the gains from better performers in the portfolio, leaving you with lackluster results overall. That’s been evident in the long-term track records for both of these gold mining ETFs, as a poor environment for the sector has led to outright declines in value for the funds over periods of five to 10 years.

    Yet if you believe that the gold market is due for a rebound, then past performance won’t necessarily reflect what the ETFs can generate on the upside if gold mining companies can take advantage of better conditions when they come. Continue reading


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