Check out a chart of the SPDR Gold Trust (GLD) exchange-traded fund since the financial crisis erupted in 2008 and you will see a sustained climb indicating that the popular way to bet on gold has seen a nearly unabated rise over the past three-plus years. The charts of ETFs tracking the companies that actually dig up the metal show a decidedly more choppy performance though, and a number of highly-regarded investors have been ringing the bell for the miners of late.
Back in September, at CNBC and Institutional Investor's Delivering Alpha conference, BlackRock chief Larry Fink made the case for gold miners, arguing that the stocks were priced where they should be if gold prices were around $800 an ounce. At the time gold was trading near $1,800 an ounce, a level it is approaching once again.
Fink is hardly the only big name that has weighed in on the metal vs. miners question facing those considering gold-linked investments. Hedge fund manager David Einhorn of Greenlight Capital disclosed in a third-quarter letter to investors that although his fund's largest position remains in physical gold — he steers clear of the GLD — some of those holdings were redirected into miners under the assumption that the price difference between the two has grown too wide.
"It has reached the point where gold mining stocks should do well even in a stable gold market; we expect the price of gold to appreciate further, so gold miners should do even better," wrote Einhorn, who upped his stake in the Market Vector Gold Miners ETF (GDX) and established new positions in both Barrick Gold and the Market Vectors Junior Gold Miners ETF (GDXJ).
Like Einhorn, billionaire John Paulson's eponymous hedge fund has been playing the gold trade on both sides of the aisle. Paulson & Co. pared its GLD bet to 20.3 million shares from 31.5 million during the third quarter, but that still represents a position worth $3.5 billion. Meanwhile, Paulson upped holdings in certain miners, including Barrick Gold (added 7,900 shares), NovaGold Resources (added 26,200 shares) and Randgold Resources (added 223,000 shares).
One of the reasons physical gold — and proxies for it like the GLD and other ETFs — has managed to stay strong is that the Federal Reserve's zero interest rate policy virtually eliminates the opportunity cost of holding an asset that produces no yield. Just a few years ago, when the Fed's benchmark federal funds rate stood at 5.5%, betting on the price appreciation of gold was a much riskier proposition. Now, with the fed funds rate pegged at a range between zero and 0.25% at least until mid-2013, Ben Bernanke and his colleagues on the Federal Open Market Committee have withdrawn one of the biggest arguments against gold and in favor of fixed-income or dividend-paying stocks.
A positive in the miners column is that some offer a modicum of dividend yield (Barrick and Randgold among them), but they also carry a number of risks that a straight bet on gold, or an ETF tracking it, does not. From political risk — many of these companies operate in countries that are not as stable as the U.S. — to the operational risks associated with acquiring and developing metal-producing mines, there are reasons why the big miners have not rallied as rapidly as gold.
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