GOAU And TGLDX - 2 Alternatives For Gold Investors

by: Andrew Hecht

Gold has been all the rage, and that looks set to continue.

Gold mining shares tend to outperform on the metal upside.

So many investment choices.

A look at GOAU.

TGLDX is a hybrid product.

In 1964 I was five years old. During that year, the third in a long series of James Bond movies came out. "Goldfinger" turned out to be the first Bond blockbuster at the box office, and it remains a classic today.

James Bond's foil in the film is Auric Goldfinger. The villain planned to rob the US bullion depository at Fort Knox. Rather than stealing the gold, he would detonate a dirty bomb rendering the metal radioactive for fifty-eight years. The loss of gold from the market would increase the value of his hoard.

Ian Fleming wrote Goldfinger in 1959, the year I was born. His inspiration for the villain was American gold tycoon Charles W. Engelhard, Jr. When I started my career at Philipp Brothers, the world's leading commodities trading house in the late 1970s; the company was a division of Engelhard Corporation, the company's founder was the real-life Goldfinger.

Gold is a metal that never goes out of style, but these days, its profile is rising with the price of the yellow metal.

Gold has been all the rage, and that looks set to continue

After a dip that took the price of nearby COMEX gold futures to a low at $1400.90 following the July Fed meeting, the price quickly recovered.

Source: CQG

As the weekly chart highlights, gold put in a bullish reversal trading pattern on the weekly chart during the week of July 29. Early during the week of August 5, after China retaliated against the latest protectionist measures from the US, the price of gold rose to a new high. The continuous futures contract on COMEX rose to $1475, and August futures reached $1486.80 and were trading at over the $1480 per ounce level on August 6.

The trend in gold is higher, and that is lifting the prices of gold mining shares even though the stock market is sustaining a significant downside correction.

Gold mining shares tend to outperform on the metal upside

Gold mining shares rose to a new high on Monday, August 5. The VanEck Vectors Gold Miners ETF product has net assets of $10.88 billion and is the most liquid diversified gold mining ETF product in the market. The average trading volume of GDX is over 49 million shares each day. GDX charges an expense ratio of 0.53%. The ETF holds shares of many of the leading companies in the world that extract the yellow metal from the crust of the earth. The most recent top holdings include:

Source: Yahoo Finance

Gold made a new high on August 6 and traded to the highest price since May 2013. Since the April low at $1266 per ounce, the price of gold has appreciated by 16.5%.

Source: Barchart

Over around the same period, GDX has moved from $20.14 to $29.01 per share or 44% as the gold mining index outperformed the price action in the yellow metal. GDX rose to its highest price since August 2016 on August 5, and technical resistance stands at the high from three years ago at $31.79 per share.

So many investment choices

Gold is not only in a bull market in US dollar terms. The precious metal is rallying in all currencies around the world. The move above the highs of the $331.30 range that contained the price of gold since 2014 in June lit a bullish fuse that continues to foster gains. Gold is now an investment vehicle that is attracting lots of attention. When it comes to riding the gold bull market higher, many instruments will move higher or lower with the price of the yellow metal. For those looking at a pure exposure to the yellow metal, the best bet is via the coins and bars that are available through dealers around the world. The COMEX gold futures market is the next step below the physical market on the pyramid. Since the futures market provides a delivery mechanism, it allows for a smooth convergence between the futures and physical market as nearby contracts move into the notice period.

Gold mining shares tend to outperform gold on the upside and underperform the price action in the metal on the downside. The mining shares are a leveraged play when it comes to the gold market as the price action in the GDX highlights. Individual gold mining shares carry a higher risk that the diversified GDX because the management of companies and individual mining properties carry idiosyncratic risk.

Two gold products that offer leverage compared to the gold price are the US Global GO Gold and Precious Metal Miners ETF product (GOAU) and the Tocqueville Gold Fund (TGLDX).

A look at GOAU

The fund summary for GOAU states:

The investment seeks to track the performance, before fees and expenses, of the U.S. Global Go Gold and Precious Metal Miners Index. Under normal circumstances, at least 80 percent of the fund's total assets (exclusive of any collateral held from securities lending) will be invested in the component securities of the index and depositary receipts representing component securities. The index is composed of the exchange-listed common stock (or American Depositary Receipts (ADRs) of U.S. and international (including emerging markets) companies that earn at least 50 percent of their aggregate revenue from precious metals. The fund is non-diversified.

The ETF has been around since mid-2017 and has net assets of $17.6 million. GOAU trades an average of 15,095 shares each day and charges an expense ratio of 0.60%. The most recent top holdings of the ETF include:

Source: Yahoo Finance

While gold and GDX have rallied by 16.1% and 44% respectively since April/May, GOAU performed lightly better.

Source: Barchart

As the chart shows, GOAU moved from a low at $11.42 to a high at $16.57 or 45.1% over the same period. Another product combines both the metal and shares, and it turned in a worse performance than the mining share products but rose more than the futures market.

TGLDX- A hybrid product

The fund summary for the Tocqueville Gold Fund states:

The investment seeks long-term capital appreciation. The fund seeks to achieve its investment objective by investing, under normal circumstances, at least 80% of its net assets, plus borrowings for investment purposes, in gold and securities of companies located throughout the world, in both developed and emerging markets, that are engaged in mining or processing gold (Gold Related Securities). It may also invest in other precious metals (Other Precious Metals). However, no more than 20% of the fund's total assets may be invested directly in gold bullion and other precious metals. The fund is non-diversified.

The product is a hybrid as it holds both gold and mining shares. Moreover, as the summary highlights, the fund can invest in other precious metals at its discretion. The most recent top holdings of TGLDX include:

Source: Yahoo Finance

TGLDX has net assets of $1.03 billion and is a fund that carries an expense ratio of 1.43%.

Source: Barchart

TGLDX moved from lows of $29.63 to a high at $40.38 or 36.3% over the period. The product provided a higher return than the blend of the move in gold futures and mining stocks offered by the GDX and GOAU products.

When choosing any gold ETF or fund product, check with your accountant or tax advisor as different products require different tax treatment. In the world of gold, there are many products to choose from these days that will reflect the price action on the up and the downside. I continue to believe that we are still in the early days of the next leg up in the gold market that will eventually take the price of the yellow metal to a new all-time high. Gold mining shares are likely to continue to outperform the yellow metal on a percentage basis on the upside as gold continues to shine.

Auric Goldfinger was a fictional character, and there are no devious plans to make the supplies in Fort Knox radioactive. However, the gold market is telling us that fiat currencies are losing value as the dollar, euro, yen, and all world foreign exchange instruments have been toxic compared to the yellow metal.

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

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

The author is long gold