Which To Buy -- Gold ETFs or Gold Mining Stocks? (ETFs: CEF, GLD, IAU; Stocks: ABX, FCX, NEM, NTO, RGLD)

by: David Jackson

Barron's bullish article about gold, which I summarized earlier today, concludes with a discussion about the best way to invest in gold if you believe the price is rising. Three alternatives are presented:

  1. Buy physical gold. This is Marc Faber's opinion, as he views gold as a hedge against financial collapse, in which case financial instruments such as futures, stocks and ETFs may have little practical value.
  2. Buy gold ETFs or a closed-end fund. There are two gold ETFs -- GLD and IAU -- and one closed-end fund, the Central Fund of Canada (NYSEMKT:CEF).
  3. Buy gold stocks. Gold stocks have the advantage that they may provide more leverage to a rising gold price than gold itself, but also carry company-specific and industry-related risks.

Trey Reik, who runs Clapboard Hill Partners, a long/short equity fund that focuses on mining shares, believes that a rise in the gold price to $1,000 per ounce would result in roughly a doubling in value of the ETFs, but a gold mining stock like Newmont Mining (NEM) could triple.

Risks related to gold stocks include exploration risks, risk of the depletion of reserves, the industry-wide problem that production costs have risen steeply, and political risks, since most mining companies operate in developing countries unfriendly to capitalism.

Other than Newmont Mining, managers interviewed for the article recommended the following mining stocks:

  • Barrick Gold (ABX)
  • Royal Gold (RGLD)
  • Freeport McMoRan (FCX)
  • Goldcorp (GG)
  • Northern Orion (NTO)

Frank Holmes, CEO of U.S. Global Investors, is particularly bullish on Goldcorp and Northern Orion. His firm owns more than 10% of Northern Orion, which he says trades at five times cash flow, compared with a peer-group multiple of 12.

But Barron's conclusion is this: "The easiest way to participate is through StreetTracks Gold Trust (GLD), an ETF that's pulled in $3.9 billion in just a year."

Full Barron's article here (paid sub req'd).