Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Gold hit a new high earlier this month and remains within reach of its record level - so why have many gold investors failed to benefit?

Those investing in the shares of gold-mining companies, rather than in the metal itself, have not seen their investments hit new highs, and may even be sitting on losses. That’s despite gold reaching $2,184 an ounce on March 10 and settling at around $2,150 today.

The precious metal’s performance has been helped by growing hopes of interest rate cuts, which reduce the opportunity cost of holding gold, and by ongoing geopolitical uncertainty, which causes many investors to hold gold for its safe-haven qualities.

But the positive backdrop has not translated into gains for the companies digging gold out of the ground.

You can see that when you compare the performance of the Ninety One Global Gold Fund - a popular fund of gold mining shares - with the iShares Physical Gold ETC - an exchange traded fund which aims to track the actual gold price. Both funds feature on our Select 50 list of favourite funds. This chart shows their performance over the past two years.

The Ninety One fund has produced returns that have been both lower and more volatile in that time. It remains significantly below its level from a year ago despite the record highs gold has reached.

To understand why requires some insight into what moves the price of gold mining shares. Gold prices are certainly one factor - a rise will automatically boost the earnings of the gold miners. In fact, a rise in the gold price tends to have an amplified effect on the profits of gold miners. That’s because miners have significant fixed costs, so any rise in the price they can sell their gold for equates to a larger percentage rise in their earnings.

Consider this simplified example. A miner produces $100 worth of gold by expending costs of $50 - leaving a profit of $50. If there is a 50% rise in gold prices, the amount it can sell the metal it produces rises to $150 - leaving $100 profit after its costs have been deducted. Therefore a 50% rise in the price of gold equates to a 100% rise in its profits.

That mathematical effect is often the reason investors are persuaded to invest in miners rather than gold itself. So why hasn’t it worked recently, when the price of gold has risen?

The answer is that any boost from the higher gold price has been outweighed by other factors adversely affecting miners. The widespread inflation we have experienced since 2021 has driven miners’ operational costs higher, eroding profits in the process. Higher interest rates have made borrowing costs more expensive as well.

The increased focus on ESG (environmental, social and governance) concerns may also have made it harder for miners to secure capital investment. Stiffer regulations can raise costs for miners who often operate in parts of the world where standards of governance and transparency are lower.

Another factor has been higher demand for physical gold among central banks, which has not extended to shares in gold miners.

All these things have caused divergence in the performance of gold miners versus physical gold. Figures produced by analysts VettaFi in November last year showed that the correlation between gold miner performance and physical gold had fallen, from 0.8 to 0.6 (where a reading of 1 equals perfect correlation and 0 equals zero correlation).1

Does that mean that those gaining exposure to gold via gold miners should change tack? Not necessarily. When we look over longer time periods we can see that there have been periods when the miners have done best. The chart below shows the performance of the Ninety One Global Gold fund versus the iShares Physical Gold ETC over ten years.

It shows that the Ninety One fund has been more volatile but has also produced periods of much stronger returns that physical gold. Many of the factors adversely affecting gold miners now can be reversed in the future if you are willing and able to wait for a turnaround, although there is no guarantee of that.

As always, it’s vital to understand what you are invested in and how your investments may behave.

More on Ninety One Global Gold Fund

More on iShares Physical Gold ETC

As at 31 Dec
2018-2019 2019-2020 2020-2021 2021-2022 2022-2023
Ninety One Global Gold 37.1 24.2 -11.7 1.0 3.8
iShares Physical Gold ETC 14.6 19.9 -2.8 11.8 7.2

Past performance is not a reliable indicator of future returns.

Source: Morningstar, 31.12.18 to 31.12.23.


1 VettaFi, 7 November 2023

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. The Ninety One Global Gold Fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. This fund also uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. There is no guarantee that the investment objective of any Index Tracking Sub-Fund will be achieved. The performance of a sub-fund may not match the performance of the index it tracks due to factors including, but not limited to, the investment strategy used, fees and expenses and taxes. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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