Perhaps the biggest piece of news ASX investors received today was the price of gold reaching a new all-time high. An all-time high price for any asset is normally newsworthy in itself. But for an asset that is thousands of years old and predates every stock exchange on the planet, it’s truly a momentous occasion.
So this morning, gold breached the US$1,920 an ounce high watermark that we last saw back in 2011 and went on to set a new record high of US$1,944 an ounce. Since gold was asking around US$1,500 an ounce at the start of the year, it has been a great year to own gold or gold-backed assets.
So, with gold at these new highs, is it too late to invest in gold? Well, before we answer that question, it’s worth noting that there are many different ways to invest in gold. There are physical bullion or gold exchange-traded funds (ETFs) for one. But today, we’re going to be talking gold miners, an increasingly popular way of gaining leveraged exposure to the gold price.
I say ‘leveraged’ because a gold miner is theoretically leveraged to the gold price. If it costs a gold miner US$1,000 to extract an ounce of gold, and gold is priced at US$1,500 an ounce, then the value of that ounce is only worth US$500 to the miner. But if the gold price rises 33.33% from US$1,500 an ounce to US$2,000 an ounce, the miners’ profitability rises by 100%. So you can see why miners are a popular way to try and profit from rising gold.
And on the ASX, there’s one major gold miner ETF that has been gaining a lot of attention recently.
Enter the VanEck Vectors Gold Miners ETF (ASX: GDX)
This ETF is from investment stalwart VanEck and tracks a basket of (currently) 53 global gold mining companies. It charges a management fee of 0.53% per annum. Some of its top holdings are the internationally-based Newmont Corp, Barrick Gold and the Franco-Nevada Corporation. But ASX-listed Newcrest Mining Limited (ASX: NCM) makes an appearance with a 4.98% weighting as well.
In the last 12 months, this ETF has delivered an eye-watering return of 46.43%. Over the past 5 years, it boasts a still-respectable annual average return of 18.84%. Of this number, only 0.71% was from dividend distributions, the remaining coming from raw capital appreciation.
Is this ETF a buy today?
A buy case for this ETF today rests on one tenet – do you think gold will climb higher from here? Nothing is free in this world, and ASX gold miners are no different. If the gold price rises further from here, it is likely that this ETF will follow suit. However, if it falls, you might be looking at some serious capital losses. Remember, leveraged investments cut both ways.
So if you’re bullish on gold for the rest of 2020 and beyond, I think this ETF could be a nice avenue to walk down. But it remains a risky investment strategy, and one I would only allocate a small portion of your total portfolio to as a result.
Motley Fool contributor Sebastian Bowen owns shares of Newcrest Mining Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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