Long GLD: 'Pure' Is The Best Way To Go Long Gold

Jun. 8.12 | About: SPDR Gold (GLD)

In my previous post I have recommended buying gold now. If you accept the idea that gold represents a good investment, you might want to buy the popular ETF for physical gold, "SPDR Gold Shares" (NYSEARCA:GLD), even though other forms of investment might yield better results, and that is because it is a pure gold play.

This conclusion was drawn after having studied the return from different types of investments in gold: future contracts, stocks of gold mining companies and the ETF "SPDR Gold Shares" . This ETF was launched on November 2004, it invests in physical gold and its expenses are 0.40% annually.

The table below presents the historical price appreciation and the Compound Annual Growth Rate between 30 Nov 2004 and 05 Jun 2012 for the following investing instruments: the ETF , the gold continuous leading future contract, the gold continuous futures contract adjusted for rollover of expiring contract and the stocks of these companies, which also take into account the dividend distribution: Barrick Gold (NYSE:ABX), Yamana Gold (NYSE:AUY), Goldcorp (NYSE:GG), Randgold Resources (NASDAQ:GOLD), IAMGOLD (NYSE:IAG), Newmont Mining (NYSE:NEM) and Royal Gold (NASDAQ:RGLD). Futures prices were extracted from the database of TradeStation Group, Inc. and adjusted for dividends stock prices from Yahoo Finance.

click to enlarge

Click to enlarge

The table clearly shows that the return from GLD, 18.1% annually, in that period was almost the same as the one of the continuous futures contract. However, the long term investor in futures must rollover expiring contracts. Notice also that because of Contango conditions on that period the actual return was only 13.9% a year, much less than the return of GLD. Among the gold miners' stocks, some showed better results and some showed worse. The best one was Randgold Resources with a return of 29.9% a year, much better than GLD, and the worst was Newmont Mining with a gain of only 2.1% annually on that same period. What these results demonstrate is that the profit from gold miners' stocks does not depend only upon the price of gold but also on the performance of the company itself, which is the most important factor.

Results from an identical study performed on much longer period, from 28 Feb 1985 to 05 Jun 2012, are shown in the table below. In this case, only two gold mining companies are listed, since all the rest is relatively young public companies and did not exist in the beginning of the period in question; for instance, GLD, as we mentioned before, was launched in 2004.

Click to enlarge

During this 27 year period the return from future contracts of gold, considering lost from rolling over expiring contracts, was only 2.7% a year due to Contango conditions during this period. Invest in stocks of both gold companies, Barrick Gold and Newmont Mining, was then highly profitable, with a compound annual gain of 18.1% for Barrick Gold and of 10.3% of Newmont Mining.

Although it seems like in the long run Barrick Gold and Newmont Mining have given a much better return, we still believe investors who decide for one reason or another to invest in gold should buy GLD for two main reasons. It is a pure gold play and it is also a much easier investment, especially in comparison to investing in a future contract where the investor must to roll over contracts. Investing in stocks of gold companies could indeed be very profitable, but it is more like investing in the company itself, rather than really investing in gold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.