Craig Dickson | Gold has never felt so strong, or so uncomfortable to own
And yet, I’ve never seen so many investors nervous about owning it.
That’s the funny thing about markets.
Investors often become the most bullish on an asset when it has surged to record highs – remember the lines around the block of people trying to buy gold and silver at record high prices at bullion stores only 4 months ago.
But now that gold has corrected in price – a very normal and healthy correction after an impressive, extended run, people are scared to buy it.
Now there are no lines at all.
If everyone was so keen to buy at USD$5000 an ounce, why is USD$4000 an ounce so scary?
Human psychology is fascinating, and the market and big money prey on it.
Now oil has surged, bond yields have moved around, and money has rotated back into technology and artificial intelligence.
Suddenly, investors are thinking:
“Have I missed it?”
“Is gold dead?”
“I’d better just wait.”
But underneath the short-term volatility, the reasons people have owned gold for centuries haven’t really changed at all.
Central banks are still buying.
Governments are still carrying enormous debt loads.
Geopolitical tensions remain elevated.
And concerns around the long-term purchasing power of fiat currencies haven’t disappeared.
In many ways, gold is currently being pulled in two directions.
Short-term sentiment has become cautious.
Long-term fundamentals still look remarkably strong.
Which brings us to a question I get asked all the time.
“OK, IF gold goes higher … how should I invest in it?”
Because saying you want exposure to gold is a little like saying you want exposure to technology.
What kind of exposure?
The metal itself?
The companies that produce it?
Or the smaller companies trying to find the next major deposit?
They are all very different investments.
And understanding that difference is incredibly important.
Why Do Investors Buy Gold?
Before we even talk about ETFs, we should ask a more important question.
Why do investors buy gold at all?
Because unlike copper, oil or iron ore, gold is not primarily an industrial commodity.
Gold is different.
For thousands of years it has been viewed as a store of wealth and, at times, a form of financial insurance.
Investors often turn to gold during periods of:
• geopolitical uncertainty
• financial market stress
• high government debt
• inflation concerns
• declining confidence in paper currencies.
In many ways, gold is the asset people reach for when confidence in something else begins to wobble.
That “something else” is often fiat currency.
Governments can print more money.
They can issue more debt.
They can run larger deficits.
Gold cannot simply be printed into existence.
That scarcity is one of the reasons investors have long viewed it as a hedge against currency debasement and financial instability.
This isn’t just an investor story either.
It is also a central bank story.
Gold has been one of the most powerful assets of the past few years, but nervous investors are still walking away.
China has continued adding to its gold reserves, extending its buying streak as it looks to diversify reserves and reduce reliance on the US dollar.
That matters.
Because central banks are not buying gold because they think next quarter’s earnings will beat expectations.
They’re buying it because gold remains one of the few globally recognised reserve assets that sits outside the traditional financial system.
And investors have been following a similar path.
After years of relatively muted interest, global gold ETFs have experienced significant inflows as investors have once again sought defensive assets and portfolio diversification.
That doesn’t look like a broken gold thesis to me.
It looks like a market that still sees gold as an important form of financial insurance.
So Why Has Gold Been Challenged Recently?
If the long-term case for gold still looks so strong, why has the gold price felt heavy recently?
The answer is that markets are constantly weighing short-term macro forces against long-term structural drivers.
Plus – human emotion.
Higher oil prices have complicated the picture.
When energy prices rise, investors start worrying about inflation.
Higher inflation expectations can push bond yields higher, strengthen the US dollar and reduce expectations for interest rate cuts.
All of those things can create short-term headwinds for gold.
At the same time, some investors have rotated capital toward areas such as technology and artificial intelligence as those themes have once again captured market attention.
This is why markets are never quite as simple as “good news equals higher prices”.
In the short term, gold is being pulled in two directions.
On one side sits:
• central bank accumulation
• ongoing geopolitical uncertainty
• rising debt levels
• concerns around long-term currency debasement.
On the other sits:
• higher real yields
• periods of US dollar strength
• investors chasing risk assets
• profit taking after a very strong run.
For me, that doesn’t look like a broken gold market.
It looks like a market consolidating while competing narratives fight for investors’ attention.
The paper market may be trading the macro.
But underneath the surface, central banks continue buying physical gold and many investors still see it as an important defensive asset and hedge against long-term currency risks.
That’s an important distinction.
Which brings us back to the original question.
If you want exposure to gold …
what exactly do you want exposure to?
Ready Player One: Owning Gold Itself
For Australian investors, two of the most popular ways to gain exposure to the gold price is through the ASX-listed ETFs GOLD and PMGOLD.
This is the “own the metal” approach.
GOLD is backed by physical metal in a London vault.
Gold is the investment everyone wanted at $5000 and nobody wants at $4000.
PMGOLD is backed by the physical gold stored in the Perth Mint.
You are effectively making one simple bet.
You believe the gold price will rise.
Or perhaps you simply want some exposure to a defensive asset in your portfolio.
There are no management teams making decisions.
No cost blowouts.
No mine shutdowns.
No poor acquisitions.
No geopolitical issues affecting a particular operation.
If gold rises, your investment thesis is likely working.
Simple.
For many investors, particularly those wanting portfolio protection or a hedge against currency uncertainty, this approach makes a lot of sense.
Ready Player Two: Owning Gold Companies
This is where things become more interesting.
And more complicated.
The VanEck Gold Miners ETF, GDX, is one of the world’s most popular ways to gain exposure to gold mining companies.
It is a completely different investment to a physical gold ETF.
You’re no longer buying gold.
You’re buying businesses.
Businesses with management teams.
Operating costs.
Political risks.
Reserve replacement challenges.
Debt.
Capital allocation decisions.
And all of those things matter.
The attraction, however, is leverage.
If gold rises, the profits of a well-run producer can rise even faster.
Imagine a company producing gold at an all-in sustaining cost of US$1800 an ounce.
At a gold price of US$3300 an ounce, that company is generating a margin of US$1500 per ounce.
If gold rises to US$3800 an ounce, the margin expands to US$2000 per ounce.
The gold price has increased by around 15 per cent.
The company’s margin has increased by around 33 per cent.
Gold is currently hovering around US$4000 per ounce – you can see the potential leverage.
This is why quality gold miners can significantly outperform the metal itself.
But it also works in reverse.
Gold can rise and some miners can still disappoint.
Costs can increase.
Projects can underperform.
Management can make poor decisions.
That is why gold miners and gold itself do not always move together.
Is One Player Better?
The truth is neither is inherently better.
They simply do different jobs.
If you want a defensive asset and exposure to the gold price itself, a physical gold ETF like GOLD or PMGOLD may make sense.
If you want leverage to rising gold prices and are prepared to accept additional risk, a gold miners ETF like GDX may make sense.
I actually think of it this way.
GOLD/PMGOLD is buying the insurance policy.
GDX is buying the insurance company.
And if you’re willing to step even further up the risk curve again and go for maximum leverage to gains, that’s where the smaller developers and near-term producers we’ve been discussing over recent months become interesting.
Because eventually somebody has to discover, develop and produce the ounces.
The Bottom Line
Gold continues to perform an important role in portfolios.
Central banks are still accumulating it.
Investors are once again allocating capital toward it.
And the reasons for owning gold today look remarkably similar to the reasons investors have owned it for centuries.
But just because you like gold doesn’t mean every gold investment is the same.
A physical gold ETF and a gold miners ETF may sound similar.
They are not.
One is exposure to the metal.
The other is exposure to the businesses.
Understanding that difference may be one of the most important investment decisions you make.
Because as we’ve learnt throughout this ETF series, the key is never simply buying the label.
The key is understanding exactly what you own.
And for those of us who enjoy hunting for individual opportunities, the next step up the risk and leverage curve is often where things get really interesting – finding the smaller gold companies that the ETFs haven’t discovered yet.
We’ve looked at some in my past columns and we’ll be looking at more in the coming weeks.
DISCLAIMER: This column is 100 per cent independent. Craig selects all themes/companies based on educational and topical value. This article should not be considered financial advice. Information and opinions provided in this column are general in nature and have been prepared for educational purposes only. Always seek personal financial advice tailored to your specific needs before making financial and investment decisions.