The variety of gold investment vehicles is as diverse as the precious metal’s role in global history. From the first known use of gold coinage around 600 BC and the U.S. gold standard to 2x leveraged inverse gold ETFs (GLL), investment interest in the ubiquitous commodity has been a constant. Some argue that investors’ fascination with gold is a remnant of a bygone era in which gold served to anchor the value of international currencies, while others cite the metal’s intrinsic qualities and rarity as evidence for gold’s place as the foundation of any investment portfolio.
Generally, gold is viewed as a diversifying investment that can be used as a hedge against inflation and a safe haven during times of global economic distress. This consensus is partially validated by the fact that prominent financial organizations across the globe value the commodity enough to acquire and hold gold reserves on their balance sheets. For example, as of March 2020, the International Monetary Fund held over 90 million ounces of gold, valued at over $137 billion USD using current market prices. Since the value of gold is primarily a product of its scarcity and its role as a status symbol (e.g. in the form of jewelry), the price of gold has a low degree of correlation with broader market indices like the S&P 500 (SPY). For investors seeking to hedge their existing portfolios against broad market downturns during times of increased volatility, this lack of correlation increases the attractiveness of investing in gold.
Traditionally, investors seeking to purchase gold as an investment could do so by purchasing physical gold in the form of coinage or bullion from a precious metals dealer and storing it in a secure location. However, this method has obvious downsides, such as lost coinage, insurance costs, costs associated with secure storage, and difficulty liquidating holdings at fair market prices. Today, investors can bypass these complications by purchasing one of the many gold investment vehicles available through public asset markets.
One of the most common avenues is purchasing shares of a gold ETF such as GLD, which invests solely in gold bullion and derives its value directly from the market price of 1/10th of an ounce of gold. Correspondingly, the chart below showing the price of GLD over the past 5 years mirrors the trend in the price of gold bullion over the same period almost identically.
Alternatively, investors could purchase shares of gold mining organizations like Barrick Gold (GOLD) and Newmont Corporation (NEM), or gold mining exchange traded funds like the VanEck Vectors Gold Miners ETF (GDX). Further downstream, investors could purchase shares in a streaming and royalty company like Wheaton Precious Metals (WPM), which provides gold miners with up front liquidity in return for the right to purchase gold at discounted prices in the future.
The above chart compares the return on each of assets mentioned above over the last six months. It shows that while all these assets have benefitted from a general uptrend in the price of gold, this uptrend has impacted each investment vehicle differently, driving a divergence in relative returns. This dynamic highlights that while all of these securities will provide investors with exposure to changes in the price of gold, each investor should consider which variation fits best with their long term investment strategy.