“What’s better: gold or gold mining stocks?” I’m asked this question often at cocktail parties, but people aren’t always pleased with the answer I give: “It depends.”

For most of the past 12 months, gold stocks had the upper hand, at least as measured by the ratio of the two most popular exchange-traded funds tracking mining shares and bullion. In February 2009, the price of the SPDR Gold Shares Trust (NYSE Arca: GLD) was nearly 2x higher than that of the Market Vectors Gold Miners ETF (NYSE Arca: GDX). But over the course of the ensuing seven months, GLD’s price multiple sank in stair-step fashion toward 2x, indicating greater price appreciation in gold stocks than in gold itself.

GLD/GDX Ratio

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Cocktail party revelers, I’ve found, aren’t particularly interested in things past, but instead are usually focused on where things are likely to go. And from the perspective of the GLD/GDX ratio at least, it looks as if bullion and bullion proxies, not mining stocks, are the better bet now. The ratio has rebounded now, such that it’s crossed to the upside of its 50-day and 200-day moving averages.

So does this mean you should abandon your gold stocks and buy gold grantor trust shares? Well, not necessarily. The GLD/GDX ratio only indicates relative strength. Bullion is in the stronger momentum play presently, but there could still be more upside in gold mining shares. After all, there’s a 75 percent correlation between the price movements of the miners fund and the metal-holding trust.

There’s another telling statistic about gold miners, though, that investors should heed: beta. Beta is a measure of relative volatility. When you compare the variance in GDX prices against GLD, you’ll find that miners are a lot riskier than bullion—in fact, by a factor of 1.69. Simply put, a 1 percent change in the price of gold would likely engender, on average, a 1.7 percent shift in the price of the mining ETF.

Beta reflects the leverage obtainable in gold mining shares. So the risk measured by beta is a real wallet-stuffer when stocks are ascendant, but not so much when equities aren’t favored. And right now at least, the sun is shining on bullion.

But cocktail-and-canape consumers aren’t interested in the statistical niceties of portfolio theory, of course; they usually just want to know whether their mining shares are likely to suffer from any slowdown in momentum. If we look at the five largest components of GDX’s universe, we can get a clue:

 

*Jan. 29, 2009 through Feb. 3, 2010

Each component has a beta coefficient with GDX that expresses its volatility relationship to the portfolio. Since the index tracked by GDX is capitalization-weighted, it’s not surprising that the beta coefficients of the largest issues are close to 1.00. A beta of 1.00 would indicate a lock-step relationship—one in which a 1 percent change in the portfolio’s value is matched by a 1 percent shift in the value of the component stock.

Still, there is a range of betas here. The lowest is that of Newmont Mining Corp. (NYSE: NEM) at .82. Over the past 12 months, NEM reflected less of GDX’s volatility than the other issues in the top tier. If there’s any persistence to beta (and there often is), we might be tempted to think that NEM would be the most sluggish stock in a rising gold market.

Implied in the rebound of GLD/GDX ratio is a bolstering of bullion’s strength against mining shares. The correlation, however, remains positive; that is, as gold rises, so too do gold mining shares. The miners just aren’t likely to move up as dramatically as in the past few months. So barring any unusual developments, NEM may be the slowest to appreciate. That’s the bad news. The good news is that the stock may also retain more of its value in a market reversal. Comparatively speaking, that is.

Now that we’ve gotten that out of the way, I’ll think I’ll scout out some canape. Did you see any rumaki?

-Written By Brad Zigler From Hard Assets Investor

 

 

We have listed some options for investing in gold through ETFs below:

LONG:

The investment (GLD) seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.

The investment (GDX) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. The fund generally normally invests at least 80% of its total assets in common stocks and American depositary receipts (ADRs) of companies involved in the gold mining industry. The fund is nondiversified.

The Funds (GDXJ) investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Junior Gold Miners Index (the “Junior Gold Miners Index”). For a further description of the Junior Gold Miners Index, see “Junior Gold Miners Index.”

The objective of (SGOL) the newly listed shares is to reflect the performance of the price of Gold bullion, less the Trust’s operating expenses. The Trust is open ended and is designed for investors who want a cost-effective(1) and convenient(2) way to invest in Gold as well as diversify their Gold holdings.

The investment (UGL) will seek to replicate, net of expenses, twice the performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective.

The investment (DGL) seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold Excess Return. The index is a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold.

The investment (DGP) seeks to replicate, net of expenses, twice the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.

The objective (IAU) of the trust is for the value of its shares 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. It receives gold deposited with it in exchange for the creation of baskets of iShares, sells gold as necessary to cover the trust’s liabilities, and delivers gold in exchange for baskets of iShares surrendered to it for redemption. The trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act.

SHORT:

The investment (DZZ) seeks to replicate, net of expenses, twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.

The investment (GLL) will seek to replicate, net of expenses, twice the inverse daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics inverse to the index. It may employ leveraged investment techniques in seeking its investment objective.

 

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