Oftentimes, when equity markets are facing tremendous volatility, investors think of buying gold as an alternative investment for protection. The shiny yellow metal has long been thought of as an asset of value, which rises during uncertain times. Think of those stories of individuals fleeing from potential war and distress with nothing but a gold coin in their pocket. This is why gold has been called a “hedge” against the market. Gold is meant to go up when stocks go down.
As investors, buying and selling physical gold can be cumbersome due to issues of storage, liquidity and protection from theft. One alternative way to get gold exposure has been through the public equity markets. As the two largest gold miners in the world are Canadian companies (Goldcorp & Barrick Gold), Canadian investors are prone to look at publicly traded miners as a proxy for gold exposure. On the surface, this appears to make sense. If gold prices are going up, then a gold miner’s stock price, whose sole business is tied to gold, should also go up. Unfortunately, in the table below, one can see the correlation between Gold Bullion (the actual gold price) and the TSX Gold Index (Canadian Gold mining companies) are far from strong.
It is apparent that gold miners behave more like stocks, which is likely not what the investor intended. Although the asset that these miners are procuring is rising in value, they are also exposed to business risks like exploration and development uncertainties, management issues, and geo-political and environmental hurdles. At the end of the day, gold miners do not provide the “hedge” or “protection” that one might expect.
Although there have been periods when gold miners outperform Gold Bullion (e.g. 1993-96), investors should keep the longer-term chart in mind. When thinking about adding exposure to this asset class, Gold Bullion may provide the type of price action that one seeks.