How do gold stocks compare to gold-backed ETCs and ETFs?

06.02.2020 - News

created by Arnulf Hinkel, Financial journalist

At first glance, gold stocks, i.e. stocks issued by mining companies, share some of the same characteristics as gold-backed ETCs and ETFs. Both asset classes are defined by the coveted precious metal and their performance is influenced by the demand for gold. Gold stocks can even offer additional return through dividend payments. A closer look, however, shows that gold stocks and gold-backed ETCs/ETFs are from entirely different investment universes and are by no means interchangeable.

Stocks will be stocks

Although mining companies’ stocks do benefit from a rise in gold demand, the price of a gold mining company’s stock is driven even more by the company’s performance. High exploration costs, the non-issuance or withdrawal of mining licenses as well as legal uncertainties, quite common in regions with large gold deposits, can cause the price of a gold stock to drop despite high global demand for the precious metal. Furthermore, gold stocks are always influenced by general stock market sentiment, just like any other company share.

Gold stocks do not serve risk diversification or inflation protection purposes

While gold-backed ETCs and ETFs, having all the characteristics of physical gold, effectively reduce risk in times of crisis when added to an investor’s portfolio, gold mining stocks can offer additional return opportunities for experienced and venturesome investors. However, they also tend to increase risk in difficult market phases due to their highly volatile price movements. In addition, anyone considering an investment in gold stocks should bear in mind that the withholding tax exemption on gains from physical gold, which applies to gold-backed ETCs with a holding period of at least one year, does not apply to returns on gold stocks.

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