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Gold Miner ETFs Besting Gold

September 20, 2012
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Since mid-July, gold miner ETFs have been beating physically held funds like GLD handily. So what’s going on?

 

For much of the past four years, gold miner ETFs have risen less than physical funds. In some ways that’s not surprising, since returns of equity funds like the Market Vectors Gold Miners ETF (NYSEArca: GDX) correlate much less to the price of gold than the likes of GLD, which hold actual gold.

Since September 2008, SPDR Gold Shares (NYSEArca: GLD), the $74 billion bullion ETF, has returned 107.4 percent, or about three times as much as the SPDR S&P 500 ETF (NYSEArca: SPY).

GLD vs. SPY

Source: Bloomberg

Fund flows data tell the same tale; namely, that investors have flocked much more aggressively to physical funds than equity gold funds, despite the higher “collectibles” tax rate imposed on funds that hold physical gold.

To-date, six gold miner ETFs trade in the U.S. market and have accumulated close to $13 billion in total assets. This number is dwarfed by the $87 million in assets held by physical funds.

Gold has long been considered a safety net, and has done a good job of protecting investors from volatile markets, as the returns above suggest. So, the investment flows since the start of the global financial crisis should come as no surprise.

But as I said, something has changed in recent months, with returns on gold miner ETFs well over twice those on physical funds like GLD.

Part of it is certainly the fact that stocks have been moving upward this year, and gold miner ETFs are equity securities.

A bull market in stocks will make all such securities relatively better off than a bear market. The opposite could be said of physically held gold ETFs: Their prices are based on demand for gold, which increases when the outlook on other investments looks grim.

The most impressive gains during this time period were notched by Van Eck’s GDX and its sister product, the Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ), as well as the PowerShares Global Gold and Precious Metals Portfolio (NasdaqGM: PSAU).

All have jumped by more than 30 percent in the past two months, compared with GLD’s gain of 12 percent over the same period, as the following chart shows.

 

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