Leverage does cut both ways. The recent drop in gold prices experienced at the end of January has also been exacerbated in the shares of these gold mining stocks. He argues, though, that while gold equities may offer a kind of amplified exposure, the underlying reason investors seek gold is for stability and ballast against geopolitical risk. That tailwind should remain intact, in his view.
In addition to their leverage to gold prices, these equities have benefitted from a huge cost decrease from one of their key inputs: oil. While it’s something of an oversimplification, many of these companies are essentially turning oil into gold, through the immense amount of energy that mining requires. Dragosits watches the ratio of oil to gold prices to help guide some of his expectations for these stocks.
Broad mining equities have also risen significantly over the course of this recent gold run. Some of that has been driven by concurrent demand for base metals like copper, while some has been tied to retail froth around silver. Dragosits explains that his ETF is designed to specialize in gold miners, to exclude as much exposure to other metals as possible. While he notes that there will be some exposure to other metals, the ETF aims to purify their exposure to ensure they capture gold price and not the drivers of other commodities.
Many other metals, be they base or precious, have prices more tied to industrial applications. That can ebb and flow with economic cycles. While gold is used in certain industries, notably jewellery, demand is more tied to gold as a store of value. That results in different price drivers that have less correlation with broader economic or stock trends.
While non-correlation is one of the goals behind a gold investment, the point is often made that gold equities are still equities and retain a degree of beta to stock market sentiment. Dragosits acknowledges that gold equities will have a higher correlation to equities than gold bullion, but argues that gold miners will have less correlation than a more broad mining stock. What makes that higher beta worthwhile, in Dragosits’ view, is that they have exposure to margin expansion, not just price appreciation. As margins expand and gold miners generate excess cash flow, they can engage in more investor-friendly behaviours like share buybacks or dividend payouts. Rather than gold itself, which pays nothing, holding a stock aims to provide access to cash flow through gold.
