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May 1, 2024

Investing For The Apocalypse - Gold Bullion A Better Choice Than Mining Stocks

by Richard Morrison

My  brother and his spouse have a bomb shelter in their backyard stocked with a 25-year supply of freeze-dried food. Fortunately, they haven’t invited us over for dinner.

Like many, they can see the world is becoming a more dangerous place. Most recently, Russian President, Vladimir Putin, warned the West that sending troops to help Ukraine risks a nuclear war. Along with the war in Ukraine, there is an active war going on in Gaza, Houthi rebels are firing Iranian-made missiles at ship traffic in the Red Sea and China appears to be getting ready to invade Taiwan. And don’t forget North Korea.

Artificial Intelligence (AI), is perceived as another threat. A recent survey of AI researchers found most felt there is a five percent chance of AI causing human extinction or other bad outcomes, a January 4 article in New Scientist magazine says. Most respondents were also concerned about AI using disinformation to manipulate public opinion, create engineered weapons or control populations, the magazine said.

My brother and his spouse need not have bothered making their shelter bomb-proof, however, since any force invading Canada will probably be able to walk up and knock on the door. Even if Canada’s armed forces had enough personnel and planes, ships, tanks and guns, our North is practically unprotected. The Americans may not help, either, if Donald Trump becomes president and follows through on his threat not to defend any country that doesn’t contribute at least two percent of its Gross Domestic Product (GDP) to NATO.

Gold Bars And Coins

Nukes or no nukes, my brother holds gold bars and coins that he hopes can be used as currency after a nuclear war, assuming there are other survivors who want it. Fortunately for him, the bars and coins have increased in value as the gold price has stayed above US$2,000 an ounce since November 2023. In Canadian dollars, the price has held in a narrow range between $2,700 and $2,750 an ounce over the past few months.

The gold price is officially coordinated by the London Bullion Market Association (LBMA), which holds two daily auctions for its 161 members, which come from about two dozen countries.

Although the factors affecting the gold price appear fully transparent, my brother and other conspiracy theorists are convinced the price is manipulated. Among other incidents, they note that about a week before the 7 October 2023 Hamas attack on Israel, spot gold was trading at US$1,926 an ounce, then plunged by six per cent to near seven-month lows just before the attack. Naturally the price soared on news of the invasion and anyone who’d bought just before the attack would have made a quick fortune. A variety of news sources have attributed the sell-off in gold to a strong U.S. jobs data report that suggested U.S. interest rates may rise. Gold conspiracy theorists, however, believe someone with the ability to influence the price knew the attack was coming.

Gold has been a traditional hedge against inflation since it cannot be printed like money and is unaffected by interest rates. Unlike stocks, however, gold generates no revenue nor earnings and pays no dividend.

Gold bars, coins and certificates can be held in your Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Plans (TFSA) providing they meet certain conditions. Gold coins must be 99.5% pure, must be legal tender and must have been minted by the Royal Canadian Mint. Collector coins, defined as coins with a fair market value of more than 110% of their gold content, are not acceptable. As well, the gold must have been purchased from a Canadian bank or other dealer that meets the government’s standards and must be held by a third-party custodian who will charge a storage fee.

Those interested in buying gold bars or coins can find dealers at Bullion.Directory, a group of digital publishing companies with links to more than 1,700 bullion and precious metals dealers, 126 of which are in Canada.

Gold Mining Companies

Gold had traded around US$2,000 per ounce for most of the past year, then in early March of 2024 it shot up to US$2,200, flattened for a couple of weeks, then began climbing again and by April 9 was trading at about US$2,350 an ounce. The share prices of many TSX-listed gold producers had been in a long, volatile slump for the previous year, but they stirred to life along with gold. Among the biggest rebounds came at Newmont Corp. (NGT/TSX), whose shares had been in a long slump before they rallied by a full 33% with the gold price. Barrick Gold Corp. (ABX/TSX) had fallen about 13% over the previous year, then rallied by more than 25% between March 1 and April 9. Similarly, shares of Franco-Nevada Corp. (FNV/TSX) had fallen by 24% between March 2023 and March 2024 before jumping 16% along with gold and B2Gold Corp. (BTO/TSX) had fallen by about 23% before the gold rebound helped it rally by 22%.

Any rally in the gold price is beneficial for gold miners and their shareholders, but while bullion is subject to the vagaries of pure supply and demand, gold miners can be hurt by negative publicity.

Environmental, social and governance (ESG) issues are particularly challenging in the gold mining industry. ESG takes the top spot in key mining industry risk reports, says, recommending that gold mining company executives be careful with tailings management, ensure their supply chains are environmentally friendly and transparent, and make greater efforts to diversify their workforces.

Environmental groups, however, are more blunt. This, for example, from the Earthworks site:

“Gold mining is one of the most destructive industries in the world. It can displace communities, contaminate drinking water, hurt workers, and destroy pristine environments. It pollutes water and land with mercury and cyanide, endangering the health of people and ecosystems.”

Brilliant Earth, an ESG focused jewellery retailer, devotes several pages to condemning the practices of gold mining companies.

“Dirty gold mining has ravaged landscapes, contaminated water supplies, and contributed to the destruction of vital ecosystems. Cyanide, mercury, and other toxic substances are regularly released into the environment due to dirty gold mining.”

The pressure from ESG-conscious investors may be a factor behind the fact that the share prices of gold mining stocks have not kept pace with the rise in the gold price. Those buying into gold mining stocks are therefore wagering on a turnaround.

In my opinion buy-and-hold investors should avoid holding gold stocks, since the long-term trend has been sideways. Some gold mining stocks can be profitably traded but only if the investor is observant enough to identify lows and vigilant enough to sell when the stock recovers. For example, share price charts of Barrick Gold Corp. show the stock has historically fluctuated between $20 and $25 every few months, suggesting a trading opportunity. The steady downturn shown by the charts of Franco-Nevada, B2Gold and Newmont Corp., however, show traders are likely to be just as unhappy as long-term shareholders.

Gold Bullion Exchange-Traded Funds (ETFs)

Gold bullion Exchange-Traded Funds (ETFs) allow investors to sidestep the corporate headaches that gold miners face and to simply track the gold price, without the dealer fees associated with owning physical gold. Since gold is denominated in U.S. dollars, however, Canadians face currency risk when they invest as any increase in the value of the Canadian dollar diminishes the value of your investment—unless, as my brother does, you keep everything in a U.S. dollar account for use when you go on vacation. Canadians can buy hedged gold ETFs to offset currency risk.

Since they all track the gold price, most gold bullion ETFs have nearly identical track records, with one-year returns of about 13% that fall to an annualized 10% over five years and five percent over 10 years. Like gold, the long-term cumulative returns of gold ETFs are poor when compared to the S&P 500. Buying gold ETFs and putting them in a theoretical drawer for years will likely be a disappointment, making them most suitable for active traders prepared to buy at what they perceive to be lows and to sell at highs.

U.S. Gold Bullion ETFs

SPDR Gold Trust (GLD) MiniShares Trust (GLDM)

The SPDR Gold Trust (GLD), the largest and most recognized gold ETF, was launched by State Street Global Advisors in 2004 and now has US$61.73 billion in Assets Under Management (AUM) invested in gold bars held in vaults beneath London, New York, and Zurich. GLD carries a 0.4% Management Expense Ratio (MER). In 2018, State Street launched the SPDR Gold MiniShares Trust in 2018 with a tiny MER of 0.1%. The fund has since attracted about US$7.67 billion in assets.

iShares Gold Trust (IAU), iShares Gold Trust Micro (IAUM)

Launched in 2005, IShares Gold Trust (IAU) has US$29.0 billion invested in about 383 tonnes of gold bars and carries a sponsor fee of 0.25%. The iShares Gold Trust Micro, launched in 2021, holds US$1.2 billion in gold and charges a sponsor fee of just 0.09%. The lower fee has helped it achieve a high 11.8% total return over the past year.

Canadian Gold Bullion ETFs

Sprott Physical Gold Trust (PHYS.U/PHYS) launched in 2010, has US$7.3 billion in gold and carries an MER of 0.41%.

iShares has two versions of its Gold Bullion ETF, both with MERs of 0.55%. The hedged version (CGL), launched in 2009, has $768.9 million in gold assets, while the unhedged version (CGL.C), launched two years later, has $240.1 million.

Three versions of the Purpose Gold Bullion ETF, the hedged version (KILO) a non-FX hedged version (KILO.B) and a U.S. dollar version (KILO.U) were launched in October 2018 with low management fees of 0.2%. The fund has since attracted about $400 million in assets. 

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post.