Which Form Of Gold Investment Provides The Best Hedge For A War Or Global Crisis?

by: Monty Spivak

There are several ways to invest in gold - bullion funds, leveraged funds, gold mining company shares, and others. The question is: Which form of gold investment provides the best risk mitigation if there is a war or major crisis?

The risk of global instability is real. In my Instablog, I identified the greatest risks and reasons for a crisis in the Middle East or Far East, as well as a few assumptions and disclaimers. Contrary to the World is Our Classroom saying: "I've learned that most of the things that I worry about never happen," worrying about portfolio-impacting events can lead to loss-mitigating results. With several gold investment choices available, which one will help us profit the most (or lose the least) should we have a war?

First, let's establish that the most likely investment candidate to buy is gold. It is a currency substitute, and has a constrained supply (the only increase is through mining new gold). Primitive societies, thousands of years ago, recognized this as an intrinsic store of value, and this has not changed. The value of gold should increase during times of uncertainty, so a long position should profit from a major war or crisis.

Therefore, in the event of a war or major crisis, buy gold bullion, funds, and gold-mining companies - pretty well any company or asset with "gold" in its name should increase in value. Gold is a globally recognized currency that cannot be managed by governments. This pragmatically explains why:

The best-known commodity/store of value during times of crisis is traditionally considered to be gold. There are multiple reasons for this. First, countries traditionally print money wildly during wars to "finance" the war, making the paper currency less valuable. And second, brutally, if a country no longer exists one day, what are pieces of paper backed by its government worth? Not much.

The challenge is not whether to choose gold as an investment, but which gold to choose, as there are alternative gold investments available. A previous article, identifies that gold bullion funds have performed the best, overall, but each of the gold investment options will provide a different risk hedge - some will be more beneficial in the event of a war, and others will be more inelastic. My biggest challenge has been to track the price of gold during a global war, as there are issues with this: 1. Gold price varies with many other factors than the risk of war; and, 2. There has not been a sustained, global-scale military crisis - which has substantially disrupted world-wide economic activities - for a long time. Therefore, I could not graph the progress of a war against the price of the various gold investment vehicles. The next step is to examine the investment opportunities for each option, and determine if they will provide the desired risk mitigation, in the event of a major crisis.

Option 1 - Gold Exchange Traded Funds (aka ETFs)

Gold (commodity or bullion) Exchange Traded Funds (aka ETFs) will most closely track the actual price of gold. This table provides the major US gold ETFs for investors to consider for gold exposure:

Exchange Traded Funds (ETFs) (Ticker)


Goldman Sachs Commodity Index (Pending:GSCI) Total Return Index ETF (NYSEARCA:GSP)

ETN is linked to the S&P GSCI Total Return Index and provides you with exposure to the returns potentially available through an unleveraged investment in the contracts comprising the S&P GSCI plus the Treasury Bill rate of interest that could be earned on funds committed to the trading of the underlying contracts.


The objective of the trust is for the value of the iShares to reflect, at any given time, the price of gold owned by the trust at that time, less the trust's expenses and liabilities. The trust is not actively managed.

PowerShares DB Gold Fund ETF (NYSEARCA:DGL)

Based on the DBIQ Optimum Yield Gold Index Excess Return and managed by DB Commodity Services LLC. The Index is a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold. You cannot invest directly in an index.


Gold Shares represent fractional, undivided beneficial ownership interests in the Trust, the sole assets of which are gold bullion, and, from time to time, cash. Gold Shares are intended to lower a large number of the barriers, preventing investors from using gold as an asset allocation and trading tool.

Gold ETFs would seem to provide an excellent investment alternative for those choosing to use gold as a hedge against a war. There are a few considerations:

  1. They do not provide yield.
  2. There is a debate between whether the funds that hold "paper gold" contracts and options, rather than the physical bullion, are the equivalent of holding gold - the article "The Case Against Physical Gold" summarizes these points.
  3. Some investors prefer to hold gold coins and ingots, which creates certain liquidity and cost impediments which are avoided by ETFs - David Fry has a good comment here.

Although these camps may not agree on which is the best alternative, it is very likely that all gold ETFs will behave like the price of the underlying gold commodity, and appreciate immediately and substantially in the event of a war.

Option 2 - Leveraged Gold Commodity Exchange Traded Funds (aka ETFs)

In "No 'Bull' About Leveraged Gold Bull ETFs," I examined how Leveraged Gold ETFs behaved relative to each other and to the price of the commodity. Two appropriate examples are:

Leveraged Exchange Traded Funds (ETFs) (Ticker)


PowerShares DB Gold Double Long ETN (NYSEARCA:DGP)

The PowerShares DB Gold Fund is based on the Deutsche Bank Liquid Commodity Index - Optimum Yield Gold Excess Return and managed by DB Commodity Services LLC. The Index is a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold.

ProShares Ultra Gold ETF (NYSEARCA:UGL)

ProShares Ultra Gold seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The Funds do not directly or physically hold the underlying gold, but instead, seek exposure to gold through the use of Financial Instruments (primarily exchange-traded futures contracts and over-the-counter forward contracts) whose value is based on the underlying price of gold to pursue their investment objective. The benchmark price of gold is the U.S. Dollar price of gold bullion as measured by the London afternoon fixing price per troy ounce of unallocated gold bullion for delivery in London through a member of the London Bullion Market Association.

In the event of a war or crisis, leveraged gold ETFs will present a multiplicative opportunity for immediate gains. If gold increases, as we hypothesize, the leveraged ETF will increase at a rate proportional to its leverage. This suggests that in the event of a major crisis, great short-term gain can be attained from this investment vehicle.

Option 3 - Gold/Mining Closed End Funds (aka CEFs)

This is the income-oriented alternative to gold investment, and it is clear that the income-generating aspect of this investment largely negates its use as a hedge for war. Closed-End Funds (CEFs) can provide investors exposure to gold miners while providing an income stream. I have identified the most popular (and largest-cap) U.S. fund in this space:

Company (Ticker)

Yield (%)


GAMCO Global Gold Natural Resources & Income Trust (NYSEMKT:GGN)


The Fund will attempt to achieve its objectives by investing at least 80% of its assets in equity securities of companies principally engaged in the gold industry and the natural resources industries. The Fund will invest at least 25% of its assets in the equity securities of companies principally engaged in the exploration, mining, fabrication, processing, distribution or trading of gold or the financing, managing, controlling or operating of companies engaged in "gold-related" activities. In addition, the Fund will invest at least 25% of its assets in the equity securities of companies principally engaged in the exploration, production or distribution of natural resources, such as gas, oil, paper, food and agriculture, forestry products, metals and minerals as well as related transportation companies and equipment manufacturers.

This article demonstrates that a CEF of gold miners does not effectively track the price of gold. We must conclude that if you are seeking capital gains, rather than yield, and want to track gold prices more directly, then the CEF alternative is probably NOT your best choice; you should probably be holding a gold bullion ETF. Otherwise, CEFs offer the only very-high yield for gold holdings, which perhaps compensates for the price difference of the commodity.

As gold-mining CEFs do not provide a direct correlation to the market price of gold, and are high-yield oriented, they should not be as responsive to a global crisis. Therefore, to hedge for the risk of war, the CEF miner alternative is not as effective as the bullion ETFs.

Option 4 - Gold Mining Shares/Debt

When hedging for a crisis with gold, one can invest directly in gold miners by buying gold mining company shares, certain gold-mining ETFs, and gold-mining convertible securities.

Regardless of the reason and type of gold security, the main purpose of your war hedge is to buy low and sell high. Now may be the peace-time opportunity to prepare for a crisis by buying gold producers. Business News network recently interviewed Jaime Carrasco, Investment Advisor, Macquarie Private Wealth, who stated:

The only conclusion to be made is that the smart money is recognizing that gold is going higher and the best value is offered by the producers; money is being committed. These corrections are great for the practice as it has allowed us to reposition many of our new clients at great prices.

This statement may be valid during peace time, but gold mining shares do not correlate well with the price of the commodity, as demonstrated here.

Let's first examine the (convertible) debt option. My previous articles: "Hedge For Inflation And Deflation With Precious Metals Convertible Securities - Part 1 and Part 2 propose that investors employ precious metals convertible preferred shares and debt, in order to provide yield with gold exposure. I also believe that it provides a combined hedge for inflation and deflation - but does it provide a hedge for a war? The short answer is "probably not." These financial instruments tend to move with interest rates, rather than the price of the underlying commodity (as indicated in the graph in this article) - so gold-mining debt may be one of the weakest options when hedging for war.

Next, let's see if gold mining stocks offer a good alternative to hedge for a major crisis. The big challenge of using gold miners as a proxy for the price of gold bullion is that the performance of the company is perhaps as great, or greater, a driver of the share price, as the price of gold. For example, Kinross Gold (NYSE:KGC) has had a string of unsuccessful mining projects and a stock-price meltdown. The conclusion reached in one of the previously-referenced articles is that one must expect variability of a gold miner's share price with the miner's profitability - not simply the market price of gold (or anticipated market price of gold).

Individual gold-miner results can trump the market price of gold, over the long term. The implication is that during times of peace, good management will drive superior results for the shareholders (through margin and profitability improvements), and there is the potential of growing the business - through acquisitions, new mines, or new finds - whereas a bullion ETF cannot outperform the price of gold.

The following comment summarizes this perspective - this was stated by manfredthree - in a discussion with John Overton, eagle1003, and Chris Sandys:

Shares in gold miners (ABX, NEM, KGC, for examples) offer leverage from human and investment capital applied to add value to gold resources in the ground on a long term basis. Individual company shares however are risky, so index/ETFs fit the "on average" view that the average company will add value through effective selection/management of resource investments, engineering etc. But there are times where for extended periods equities generally are discounted , possibly (and ironically) from the same fears that drove bullion prices up. Additionally, there are dozens of real life/ secular factors that can diminish miner valuations individually or as an index or ETF group. Strikes, confiscations, taxes, capital cost blowouts, mismanagement, etc. can punish individual miners, but as a whole the group are growing profitability. Existing mines can grow despite barriers to new entrants, and despite overall mine supply not growing. It is , in a low rate environment , a bit irrational to believe bullion can keep outpacing established miners as a group for an extended period. Established miners will be the greatest benefactors from entry barriers. NUGT is valid as long as "the tide is out" for miners, sort of a surf board waiting for a little wave.

This is certainly a compelling argument during times of peace - quality management can deliver exceptional results. However, in the event of a crisis, a good business model cannot compensate for the price of a risk-protection asset. Therefore, miners - as they are a business - are not a good investment choice for risk protection of a war or crisis.

In this category, I will also include leveraged and unleveraged Gold Mining ETFs, such as Direxion Daily Gold Miners Bull 3x Shares ETF (NYSEARCA:NUGT), as they should behave in concert with the gold mining securities (with greater price swings, depending upon the price movement of the underlying basket of securities). Again, these are leveraged funds based on the business of gold mining, rather than the commodity price, which should vary more extremely in the event of a major conflict.

What are the implications for investors in the event of a war or major crisis? Some gold miners will be more closely aligned with the market price of gold than the CEFs, and gold miner convertible securities are not as volatile or correlated. The implication is that certain gold miners may provide gold-like portfolio "insurance," in the event of a war, but it will not be as effective as the ETF which tracks the price of bullion through actual gold holdings.

Option 5 - Gold Options

Options are either buying or selling puts or calls on gold miners or gold ETFs. Without getting "into the weeds" on the nature of options (there are many SA authors who brilliantly cover these), they are basically promises to either buy or sell the specific security at a future date at a contracted price. Like any other financial transaction, there is a buyer of seller. Let's look at a simple example:

  1. SPDR Gold is currently trading around $160.00. Today, one may sell one February 2013 call contract (which is 100 shares) of GLD, at a strike price of $160.00/share, and earn a fee of over $3.00/share. If requested (or called), you have now promised to deliver these GLD shares to the purchaser of the contract for $160/share up to the third Friday in February. If GLD trades at $159.99 or less, your shares will not get called, but if they increase in price to $160.01 or more, you are obligated to sell your 100 GLD shares.
  2. If one buys, instead of selling this option, one now can buy the security at $160.00 - regardless of the current price. This can be an enormously leveraged gold transaction; your fee was only $300.00/100 shares, and you are betting that the $16,000.00/100 GLD shares will increase at least $300.00 in aggregate value before February 15, 2013 to break even.

Clearly, depending upon whether one is the buyer or seller of an option, and which type of option, will determine if he will benefit from an upward or downward movement in gold prices (which may or may not be mirrored in the underlying security prices). Moreover, both parties can benefit from the price movement, but the distribution of the upside (or downside) would depend on the strike price of the contract and the price of the underlying security. As well, the option will expire - and often does expire worthless (i.e., are not exercised). Therefore, with all of these variables in play, options are one of the riskiest alternatives, and should probably be left to those with the appropriate expertise.

With all of these caveats, if you anticipate a war, you can buy a call on GLD (or other gold fund) - you pay a fee that gives you the option, but not the obligation, to buy GLD at a determined price before a fixed future date. In this case, if GLD substantially appreciates, you get to buy it at a defined (lower) price before the expiry date. The bottom line... a high-risk, high-return investment strategy - if you predict accurately, and take the right option positions, you can be an enormous financial winner from options on gold-underlying securities, in the event of a war.

Option 6 - Gold Substitutes: Silver and Commodities

The last investment alternative that I will examine is a broad category of gold-substitutes, including silver and commodities. Similarly, holdings and producers of diamonds (and other precious and semi-precious gems) - a very portable but relative illiquid asset - and other precious metals, such as platinum, should retain or increase in value. The major concern of this type of investment is that they are neither gold holdings nor gold-producing assets. That said, can they provide a similar hedge for a war? My suggestion is "maybe," but they will not provide the same type of risk protection as gold.

In previously referenced articles, I have covered and graphed certain silver ETFs versus gold ETFs. Silver outperformed gold over the last five years, but did not track its price movements. A SA author who has covered silver quite extensively, Christopher F. Davis, has explained in a number of articles how silver is an attractive investment of choice. The finding is that silver may be a "poor man's gold," and an excellent investment in its own right, but it does not track the price of gold. Therefore, one could use silver as a hedge for a global crisis, but do not expect it to behave in conjunction with the price of gold.

I lump the other precious metals (and gems) with silver - these are relatively scarce and there are certain industrial uses for some (like silver, and unlike gold), but they are just not the same as gold as a hedge for global risk - there is no evidence of pricing these commodities with global risk.

Commodities, generally, are not a direct substitute for gold. Wars move, consume, and expend enormous resources, so commodity prices should respond positively to adverse news:

If you were to look at a chart of the price of wheat adjusted for inflation, you would see a spike in price during the wars - which shows the government printing of money at the time. Commodities - if they're good for anything - are a good crisis hedge.

That said, gold is gold - and not wheat or corn. In other words, commodities are not generally recognized stores of value, so despite that they may provide investors a benefit from global instability, I propose that these be treated as a separate asset class.

Commodities are outside my area of expertise, and my assumption is that you will need to research this and/or consult an expert. There is a long list of leveraged and unleveraged Commodity ETFs, for US, Canada, and the UK, at Stock-Encyclopedia. In a SA article "ETFs To Protect You From An Israel / Iran Conflict," Sammy Pollack provides lists of ETFs which will help manage the downside, and potentially provide upside. There are overlaps with some of the funds provided in the previous categories. Again, these funds are outside my personal investment scope; I rarely buy funds - I cannot identify a pure commodity play that generates yield (which would be sort of a commodity-ETF tracking oxymoron as commodities do not provide dividend yields), so have opted to indirectly invest in commodities through resource production companies.

To summarize, the gold-substitutes may be attractive investments, and effective hedges for war, but will not trade correlated with the price of gold. Therefore, they may not provide the degree of "insurance" that one may seek by holding bullion.

Comparing the Alternatives

The matrix, below, can help you decide which of the investment options best meet your investment goals and mitigation strategy in the event of a war - the premise is that the market price of gold bullion will spike, and these are your investment options and the likely responses:

Option / Attribute

Option 1 - Gold ETFs

Option 2 - Leveraged Gold Commodity ETFs

Option 3 - Gold/Mining CEFs

Option 4 - Gold Mining Shares/Debt

Option 5 -Options

Option 6 - Gold Substitutes: Silver and Commodities


Holds gold and options

Multiplies the changes of gold prices

Portfolio of gold miners

Individual mining co. shares or convertible securities

Buy/sell options on securities

Silver ETFs and/or commodity ETFs

Examples (tickers)





Calls on GLD



Tracks gold and/or future contracts

Has outperformed other alternatives

Huge swings can magnify gains

Can pay high (managed) distributions

Return based on business and margin of gold mining

Business decisions may outperform the commodity price during times of peace

Very highly leveraged - one can invest small amounts for huge gains

Depending on the option, one can cap loss risks

Inexpensive; disconnected from gold price; may benefit from instability for other reasons than the price of gold


No yield

A trading security that should only be held for hours or days - long-term holding exhausts the asset

May vary indirectly with the price of gold - there are other factors (such as non-gold holdings) impacting the security price

Management decisions, local jurisdictions, and other factors, may have a bigger impact than gold price

Value of the option degrades over time and may expire worthless

May not be correlated with gold prices; may deprive the investor of gold and war volatility gains

Probable response to war or major crisis

Spike immediately

Multiplied spike of the gold price

May increase due to uncertainty, and other holdings may contribute to increase/decrease

May not respond immediately to a crisis. Eventually, the increased gold margins will increase margins (unless hedging is in place)

Depends upon your side of the put or call option - the response would be a leveraged spike up or down

Silver and other precious metals funds would probably spike, but less than gold

Commodities will probably increase in value, but this has no relation to gold prices


Best hedge for a long-term war

High return at the outset of a war, or when there is a major turning point - at the points of greatest volatility

Only a fair hedge for a war - it may be least responsive to a war or crisis

compensated by the high yield at all times

Depends upon which gold company or fund.

Probably a fair hedge for a war, but longer-term beneficiary

Possibly the better choice during peaceful times

Depends on the option purchased/sold but has the potential to be a "lottery win"

May be the least correlated with impact of war

Depends on the precious metal substitute or commodity

The choice depends upon your perception of the possibility of war versus your investment goals. I would briefly summarize it as follows:

  1. Option 1 - Gold ETFs - Best for a long war. Possibly the best at all times.
  2. Option 2 - Leveraged ETFs - High short-term gain at outset or turning point of a war (spikes in gold prices).
  3. Option 3 - Gold/Mining CEFs - Best for yield at all times; not particularly responsive to a war.
  4. Option 4 - Gold Mining Shares/Debt/ETFs - Best overall potential return for peace, but results depend on factors such as management capabilities and interest rates.
  5. Option 5 -Options - If predicted and timed accurately, a very-leveraged gold play, which can provide magnitudes of return at the outbreak of a war. My belief is that this is best left to the experts.
  6. Option 6 - Silver and Commodities - May be the least correlated with impact of war, and it may be the least correlated with the price of gold bullion.

Personally, as a yield-oriented investor (and optimist that peace will generally prevail), I have chosen Options 3 and 4 (via convertible securities) for my gold holdings. That said, it is clearly not the best choice for a war-time holding.

To summarize, different gold and gold-proxy investments will provide heterogeneous results in the event of a war or major crisis. If you believe that war is imminent, choose the asset class which will be the greatest beneficiary; otherwise, choose ones that will benefit from peace.

The World is Our Classroom, things I've learned has another quotation that aptly wraps up this article: "I've learned that if there are no problems there would be no opportunities."

Disclosure: I am long GGN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Also long Canadian gold-miner convertible debentures, ETFs, and CEFs