Blending gold with gold-mining equities
- May 1, 2020: Vol. 7, Number 5

Blending gold with gold-mining equities

by John Corcoran

Gold and precious metals mining equities have suffered in the market downdraft along with other risk assets, down 20.3 percent year to date through March 17, after rising an impressive 52.9 percent in 2019. They have outperformed the S&P 500 marginally so far this year and meaningfully over the past 12 months. Changes in the macroeconomic and geopolitical risk environments have made both bullion and precious metals mining securities more attractive in the eyes of many investors.

Those seeking a non-correlated asset class that may provide differentiated return characteristics in volatile markets might want to consider blending their positions in gold with precious metals mining equities as a part of their overall portfolios.

A convergence of factors is pushing physical gold higher, which is generally good for the precious metals mining stocks. Gold is a hard asset that tends to perform well in a slower growth environment when equity markets are facing higher volatility, geopolitical turmoil is brewing, real interest rates are stable or falling, and/or investors fear weakening currencies. Many of these factors have been manifesting themselves concurrently in early 2020. In addition, the coronavirus epidemic has spooked investors, which has helped push the CBOE Volatility Index up over 500 percent in four weeks. Gold tends to benefit during volatility spikes as investors seek safe havens.

With respect to gold and precious metals equities, the primary driver of their strong performance over the past year has been the rising price of gold and other precious metals. Because the mining equities have both earnings and operating leverage to metals pricing, the gold and precious metals equities have historically outperformed the price of gold by twofold to threefold when both bullion and precious metals mining stocks are rising. While that has not been the case year to date as investors have shed risk, it certainly has been true since gold made its decade low at $1,051 per ounce Nov. 17, 2015, and it was also true in 2019 when the XAU Index outperformed gold by more than 2.8-times.

To be clear, short-term moves in precious metals are notoriously difficult to predict consistently. In addition, leverage can work both ways; when precious metals prices fall, the mining equities may decline by even more. We also recognize that ETF holdings of bullion and speculative positions in gold are relatively high on a historical basis.

What we do know is that multiple factors have come together this year to support gold and even push it higher. We also know these factors are complex, varied and geographically dispersed — and what is good for gold is often very good for the gold mining equities.


John Corcoran is a senior client portfolio manager at Invesco. This article was excerpted from his blog post at this link:

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