Among the many options that exist to invest in gold are funds. Although the precious metal is the underlying of these funds, in this post we are going to explain that their relationship is not as direct as it might seem, which is a fact that must be kept in mind before deciding on this investment option.
In recent weeks we have received several inquiries from readers interested in the operation, advantages and disadvantages of gold investment funds.
We have briefly addressed this issue in other posts dedicated to explaining the different formulas for investing in gold. However, it seems pertinent to dedicate one exclusively to explain its advantages and disadvantages.
What Are Gold Investment Funds?
These are funds that invest part of their assets in shares of companies related to the gold industry.
For example, the Schroder ISF Global Gold fund invests part of its $360 million assets in shares of Newmont Goldcorp , the world’s largest gold miner by production volume, and Agnico Eagle Mines , among other companies.
Another of the most important funds of this type, the Edmond de Rothschild Goldsphere , invests at least 70% of its assets in the gold exploration, extraction, processing and/or commercialization sector.
Among the mining companies in which it invests, in addition to Newmont and Agnico Eagle, are the Canadian Barrick Gold (the second in the world in production); Kirkland Gold and Alacer Gold .
However, these funds are not exposed to gold or physical precious metals, not even through futures contracts on these products, so strictly speaking, it cannot be said that a participant in one of these funds is investing. in gold.
Advantages And Disadvantages
As in any type of investment, gold funds have advantages and disadvantages, which investors must assess before deciding on one or the other option.
Let’s first review the possible advantages :
- There are multiple fund options with varying exposures to mining companies and other gold-related businesses.
- The returns they offer are very interesting in some cases.
- By not having a direct exposure to physical gold, there are no expenses derived from its custody .
Its operation is very simple for the participants, since there is a manager who is in charge of the investments.
On the contrary, the main drawbacks are the following:
- The fact of investing part of your assets in shares implies high volatility and exposure to possible general falls in the markets.
- As we have already said, they hardly have any relationship with physical gold , beyond investing in shares of the companies that are in charge of extracting it. Therefore, it cannot be said that an investor who participates in one of these funds has gold in his portfolio.
- As it does not have a direct relationship with gold, there is no direct impact from increases in the price of the metal . In fact, profitability depends on whether the investee is willing to pay dividends.
- Management commissions represent a significant expense, which does not exist in the case of buying physical gold.
- Your risk is greater than that of owning physical gold , which is not always offset by higher returns.
Profitability funds vs. Physical gold
As we have explained on several occasions from this blog, one of the main aspects that must be taken into account before opting for one investment asset or another is the balance between risk and return.
The higher the return on an investment, the higher the investor’s risk of losing part or all of their investment. In the same way, the lower that return, the lower the risk that will have to be borne.
In the case of the comparison between funds that invest in gold and physical gold itself, the issue is not so clear, as we are going to see.
These were the four best gold funds during 2019, according to Morningstar (as of 12/31/2019):
- SCHRODER ISF GLOBAL GOLD : Its profitability in 2019 was 53.9% . The profitability of the last three years was 7.53% .
- FRANKLIN GOLD & PRECIOUS METALS FUND : Its return last year rose to 51.9% . In three years, on the other hand, it was -0.23% .
- LANDOLT INVESTMENT (LUX) SICAV GOLD : It offered a return of 51% in 2019. In three years, its return was -2.09% .
- EDMOND DE ROTHSCHILD GOLDSPHERE : Your return last year was 44.9% . In the last three years, it was 2.47% .
Without a doubt, the spectacular figures of 2019 may attract the attention of potential investors, but they must be placed in context. A punctual return of one year can be a good investment, if the objective is short-term and there is no aversion to risk. But we have seen that when the term is extended, the results are more than discreet.
For comparison, during the last three years (from June 26, 2017 to June 23, 2020), the price of physical gold on the London Bullion Market Association (LBMA) rose from 1,245.25 to 1,768, $90 an ounce . This represents a revaluation of 42.05% in three years , much higher in that time horizon than any of the most profitable funds.