What returns have gold fund investors achieved?
Investing in the shares of gold mining companies has a potential advantage when gold is moving higher. Gold miners generally have high fixed costs, meaning that a small percentage rise in the price of gold can generate a disproportionately large increase in gross mining profits.
This relationship doesn’t always work out, especially over shorter time frames. Gold mining companies transition through stages just like other companies. Smaller companies especially may need additional capital from shareholders to expand.
Larger, more established companies may be under pressure to return money to shareholders by way of dividends or share buybacks. Or they may be on the acquisition trail, more focused on capturing market share than annual profits.
Such factors mean the prices of gold miners can deviate substantially from the gold price over shorter time frames. After a positive 2022, this happened in 2023. Gold mining shares fell in aggregate despite a small rise in the gold price.
The poor progress of shares in the world’s two largest gold miners – Newmont and Barrick Gold – played its part. Newmont’s $17 billion acquisition of Australia’s Newcrest weighed heavily on the former, as investors considered the complexities of the deal against a background of falling output. Meanwhile, disappointing production rates and a shift to copper exploration raised questions at Barrick.
To make matters worse, investors were heavily locked into developments among US tech companies and the hyperbolic growth of artificial intelligence (AI). By comparison, old economy shares mostly bumped along the bottom, both in terms of their share prices and earnings multiples.
What are the prospects for gold and gold mining funds now?
How well gold performs from here could depend on how quickly interest rates actually fall versus consensus expectations. As usual, wildcard, negative events in geopolitical terms or an unexpected retracement in stock markets could deliver a further boost.
Gold has already exceeded Capital Economics’ year-end target of $2,100 per ounce and even its $2,150 per ounce target for the end of 2025, implying limited further upside over the short term6.
Earlier this week, the Australian bank ANZ reiterated its long-term positive view of gold and expectation that prices will average over $2,000 per ounce in 20247.
Positively for medium sized and smaller gold miners, last year’s disconnect between the gold price and gold mining shares may now encourage more large miners to embark on the acquisitions trail.
Can I invest in gold in my ISA or SIPP?
The purest gold investment is in bullion or gold coins, but neither of these can be held in an ISA or SIPP. On the other hand, gold funds can be held this way.
Gold funds offer a way of investing in gold without physically owning it and are predominantly of two main types – tracker funds and funds that invest in the shares of gold mining companies.
What are the Select 50 options?
Fidelity’s Select 50 list contains two funds designed to provide a gold exposure. They entail differing performance characteristics and levels of risk.
The Ninety One Global Gold Fund, previously the Investec Global Gold Fund, invests in a worldwide portfolio of gold mining companies while also having the flexibility to buy physical gold funds and shares in companies that mine for other precious metals.
The second gold fund among the Select 50 – the iShares Physical Gold ETC – has a closer association to the gold price and is backed by a physical gold entitlement. As such, it may not be the best fund to own when shares in gold mining companies are providing all the excitement, but it may prove more defensive during periods when gold is out of favour.
Source:
1 Bloomberg, 07.03.24
2 World Gold Council, 08.02.23
3 Bloomberg, 07.03.24
4 CME FedWatch Tool, 07.03.24
5 World Gold Council, 07.03.24
6 First Gold, 05.02.24
7 Reuters, 06.03.24