PHYSICAL GOLD OR GOLD MINERS
by Florian Dinu, Eng.Â Trading SP500.com
To protect against inflation which investment is better: Gold miners or Gold metal itself?
We all know that Gold has been for centuries a good hedge against inflation and world uncertainties. One that wants to invest in gold does not necessarily have to buy gold bullion or gold mint coins. There are ETFs for Gold, the most traded in the US being SPDR Gold Shares (symbol GLD). There is also an ETF for Gold miners, Market Vectors Gold Miners ETF (Symbol GDX).
The question that arises is: Which investment is better: Gold miners or Gold itself? The answer is: It depends on timing. We will have to look at their 3 years chart and analyze it.
In normal times, there should be a close correlation between those two. But these are not normal times. As you see from the chart, from April 2006 to March 2008, GDX and GLD went almost hand-in-hand. After that we notice the drifting, and GLD starts outperforming the GDX. That coincides with starting of turmoil in the financial markets. Panic caused investors to sell their gold equities and hide into gold itself as a safe haven investment.
Was it a good move?
Initially yes. But we all know that panics, just like bubbles, do not last forever. I think that right now we are in a post-panic period. But, gold is still too high compared with the Gold miners.
There is an over 40% drift between the two for the 3 yrs period, and that gap should narrow. If gold goes down, miners will be less affected because they hedge their production a few years ahead. If gold goes up, miners will gladly increase production, so their profit margins and net income will increase accordingly.
To me, shorting the gold metal and buying the gold miners is a no brain-er.