If you look at the performance of all the gold funds, the returns are quite disparate. As on December 1, 2011, Gold Exchange Traded Funds (Gold ETFs) delivered a one-year return of around 39.85 per cent. The other two gold funds fell way below. AIG World Gold had a return of around 8.83 per cent while DSPBR World Gold found itself at the bottom of the rung with just 10.23 per cent.
If anything, this should be a reminder that investing in gold-related investment products is not to be done blindly.
The gold mining funds
If you invest in DSP BlackRock World Gold or AIG World Gold, do so with the realisation that neither fund will hold physical gold or any metal. The investment will take place in stocks of companies in the business of extracting, processing and marketing of gold. Investment may also take place in companies engaged in the business of mining other metals or precious stones. Geographically, the investment universe is not limited - investments will take place in companies across the globe. While they are similar in the above aspects, it would be naïve to assume that their portfolios are similar.
Though the top 10 holdings account for pretty much the same allocation, there are just five identical stocks found amongst them and that too with a different allocation. In terms of sector allocation too there is a difference. Naturally, since the sector allocations differ and so does the stock picking, it would translate into differences in the geographical allocation as well as the returns.
For instance, DSPBR World Gold has its highest allocation to Newcrest Mining, which is Australia’s largest gold mining company. Incidentally, Newcrest Mining saw its share price crumble in October on the news of sagging output; it reported lower gold production in the September quarter. On the other hand, AIG World Gold is betting the most on Goldcorp Inc, a North American gold producer with mining operations in various countries including the US, Canada, Mexico, Brazil, Argentina and Australia.
AIG World Gold tends to hold a little more cash than its peer and rarely does any investment outside gold and silver. Even earlier this year, this trend was prevalent in its portfolio. And its annual returns over the past two years and its year-to-date returns put it ahead of DSPBR World Gold.
The options available
It is safe to say that bullion and gold mining stocks are entirely different asset classes. Unlike mining stocks, bullion is not subject to changes in production costs, management skills, availability of financing or exploration success. On the other hand, these stocks could deliver handsomely not only because of the metal they mine but because they embody a neat trait called leverage. So when the price of gold rises, they rise by much more. While the positive leverage could be as low as 2 to 1, it has been known to go up to 4.5 to 1. What this means is that for every 1 per cent rise in gold, there is a 4.5 per cent rise in the gold stock. But that holds true in an equity market bull run. The reverse can take place in market downturns even if the price of gold does not fall. In 2008, gold mining stocks could not escape the selling panic in the general equity and commodity space. Even currently, Gold ETFs boldly reflect the run-up in gold but the gold equity funds lag way behind.
If you are just plain happy betting on the price of gold, then consider a Gold ETF. In its best year, the performance will fall short of that delivered by a gold mining fund. Till date, the best year in a Gold ETF has delivered 55 per cent while it has been around 148 per cent in a gold equity fund. But its worst year will not disappoint as much as the equity oriented fund will. Even in its worst annual period, a Gold ETF has delivered a positive return of 2 per cent. Compare that with -55 per cent of DSPBR World Gold.
If you are in for the long haul, then you could consider a gold equity fund. While gold mining stocks will track the price of bullion, they are still stocks whose performance co-relates to the equity market. If you want a pure play on the price of gold, they consider a Gold ETF. Alternatively, you can distribute your gold allocation between these two types of funds. If you want a very miniscule holding to gold, then consider some of the hybrids where the fund manager takes a call on when to increase or lower the gold allocation. Canara Robeo InDiGo stands out here because it combines just debt and gold. Keep your equity allocations separate.