Record inflows show gold ETFs are better safe haven play than mining stocks, analysts say

Georgina Lee

As gold prices surged to a seven-year high in January, some analysts are promoting exchange-traded funds as a better proxy for the metal’s outlook than owning shares of gold-mining companies.

Net inflows into gold-backed ETFs totalled US$3.1 billion in January, equivalent to 61.7 tonnes, boosting their holding of the metal to an all-time high of 2,947 tonnes, according to the World Gold Council.

The rally was built on global central banks’ monetary easing, resulting in lower-for-longer real yields in the US and even negative interest rates in Europe. A series of economic calamities over the past year, including a bitter US-China trade war and the coronavirus outbreak has also increased the metal’s safe haven appeal.

Spot gold has climbed 3.9 per cent this year to US$1,576 per ounce as on Thursday, after hitting a seven-year high of US$1,589 on January 31, according to Bloomberg data. The rise has tracked a 4.4 per cent gain in the S&P 500 Index and outpaced the 1.3 per cent drop in the Hang Seng Index and a 4.2 per cent reverse in the Shanghai Composite Index. Zijin Mining, China’s largest gold producer, fell 1.3 per cent in that time.

“Even during a gold bull market, there are still a lot of uncertainties surrounding a gold mining company’s earning prospects,” said Robin Tsui, Asia-Pacific gold strategist at State Street Global Advisors, which manages the SPDR Gold Trust. Miners tend to mine lower grade ore when prevailing gold price is on the ascent to compensate for high costs, he added.

SPDR Gold Trust, the world’s largest ETF backed by the yellow metal, has risen 3.1 per cent this year to HK$1,151, while the Value Gold ETF managed by Value Partners also gained by the same margin.

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Gold ETFs typically shadows spot-price performance, with nearly one-to-one correlation, according to Tsui, meaning they move in lockstep. The correlation with mining stocks, though, is less impressive, at 0.3 to 0.8 times seen during the crisis that followed the fall of Lehman Brothers Holdings in late 2008.

“As gold price has gone up by 50 per cent since 2016, some of the miners’ costs have been increasing faster than that,” Tsui said. “Hence, the unpredictability of a miner’s earnings could lead to their share price underperformance” making them a poorer choice as a proxy to gold’s allure.

Helen Lau, an analyst at Argonaut, a brokerage focused on covering metals and mining and energy sectors, said her team has recently upgraded its forecast for average gold prices to US$1,600 for this year, up from US$1,500.

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“When the equity market gets sold off, gold-backed ETFs offer a valuable hedge,” she said. Investing in gold mining stocks means “investors need to research thoroughly on the mining companies’ earning drivers, balance sheets and cash flow to navigate the market volatility.”

Not all investors are prepared to engage in such fundamental research, she said. As an example, gold contributed about half of Zijin’s mining operating income for the first half of 2019, while the balance was derived from the sale of copper, lead, zinc and iron ore, according to its earnings report.

For retail investors, however, they need to be mindful that gold ETFs do no pay dividends, the analysts said. They also need to monitor their trading volume, because not all of the five Hong Kong-listed gold ETFs generate daily transactions, exchange data shows. Thus, there is some hurdles for investors to cash out readily in the secondary market, they added.

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