Why I invest in gold proxies rather than gold

[i4value]

A gold proxy stock is a publicly traded company whose financial performance and stock price are closely correlated with the price of gold. These stocks are often associated with companies involved in the exploration, mining, production, or distribution of gold.

ChatGPT listed about half a dozen reasons why you should invest in gold proxies rather than gold. They ranged from liquidity to convenience.

But it did not cover why I invest in gold proxy stocks rather than gold.

I am a value investor and I buy a stock when its stock price is at a significant discount to its intrinsic value ie I buy when it is “cheap”.  And I defined intrinsic value as the discounted cash flow generated by the underlying business over its life.

Gold does not have any intrinsic value and its price is driven by market sentiments. I am not able to determine whether gold is cheap at any point in time. 

While I do have a small amount of investment in gold, it is like my crypto investments – they are speculative play.

On the other hand, I am able to determine the intrinsic value of a gold proxy stock. Of course, there is a more important question of how you assess where is stock is good gold proxy. But this is story for another day.

For more insights into Bursa gold proxies, go to “Are there Bursa proxies for gold?”

[i4value]

To answer this question, I compared the gain from gold compared to Bahvest based on the short-term situation ie 2019 to 2022.

From 4 Jan 2019 to 26 Aug 2022, gold appreciated by 8.5 % CAGR. If you have invested in Bahvest, you would have a compounded annual total loss (capital gain + dividends) of 5%. Yep. The share price of Bahvest declined and there was also no dividend.

On such a basis there is no advantage to investing in Bahvest. Bahvest is into gold/silver mining. Studies from other parts of the world suggest that it is better to invest in gold than in gold mining companies.

For more insights on Bursa gold proxies, refer to “Are there Bursa proxies for gold?”

[i4value]

I was looking for Bursa gold proxies to invest in by comparing the returns from investing in gold vs investing in a number of Bursa gold proxies.

From 4 Jan 2019 to 26 Aug 2022, gold appreciated by 8.5 % CAGR. The returns for the 4 Bursa companies for the same period are shown in the table.



You can see that only Bahvest return was lower than that for gold. Bahvest is a gold miner whereas the other 3 are gold jewellers.

In the context of proxies for gold, gold miners are typically considered a more direct and volatile proxy for the price of gold. When the price of gold rises, the profitability of gold mining companies often increases significantly. However, their performance can also be affected by factors specific to their operations.

Gold jewellery companies, on the other hand, are influenced by both the price of gold and consumer demand for jewellery. Their financial performance can be influenced by factors such as fashion trends, and marketing strategies. Their performance may not always correlate as closely with changes in the gold price, making them a less direct proxy for gold.

Moral of the story? Invest in the Bursa gold jewellers rather than gold.

For details refer to “Are there Bursa proxies for gold?”

[weijian]

Hi i4value,
I have consolidated your gold proxies discussion into 1 thread since they are all similar. It will be easier for VBs to follow/read.

In future, please do consider whether to use existing threads, before creating new ones. VBs would appreciate that.

Moderator

[i4value]

OK. Actually I do a search before I post. Either my keywords are wrong or the search engine covers on specific phrases.

[i4value]

Can you diversify your Bursa stocks portfolio with gold?

Gold is often considered a safe-haven asset. During times of economic uncertainty, investors may flock to gold as a store of value. You may think that gold prices should be negatively correlated with the stock market. As such you should consider gold as a form of asset diversification for your stocks.

But is this true for a long-term investor in Bursa? The chart (reference https://i.postimg.cc/FHBYShR5/KLCI-vs-gold-price.png) shows the trends for the KLCI and Gold Prices for the past 20 years. You can see similar patterns. The correlation is 0.81.

I would say that given the high long-term correlation, gold is not a diversification asset for your Bursa portfolio.

This is of course contra to the commonly held view. According to Chat GPT, historically, there has been an inverse correlation between gold and stock prices.

Well, this is not true for the historical long-term Bursa case.

Of course, the picture may be different for the short-term trader. But this is a story for another day.