Gold, always believe in your soul

Main photo: Gold bullion at the National Bank of Poland by 
Giorgio Monteforti licensed under Creative Commons Attribution 2.0 Generic (CC BY 2.0).

Quick post today to note how I’ve added to my holdings in gold. I’m no gold bug by any stretch of the imagination, but do allocate a small chunk of my portfolio to the yellow metal, mainly using ETFs. I do hold one stock of a gold miner in South Africa, which was a purchase early on, when I first started constructing my portfolio. But I have little interest in following mining companies, and am more interested in using gold as a position to protect against uncertainty and turmoil, as well as hedge against inflation.

Anyway, given the concerns in the market surrounding the possibility of higher inflation and the overhanging uncertainty about the Covid-19 pandemic, I decided to add to my gold holdings using some of the profit from selling out of Audioboom. I was focused on two gold ETFs trading in GBP – WisdomTree Physical Gold (PHGP) and VanEck Vectors Junior Gold Miners (GJGB). I see PHGP more as a store of value and GJGB as an instrument that is more likely to benefit from volatility. The reasoning goes that miners are generally expected to trade higher than physical gold in times of elevated gold prices, and so you’d hope to see a proportionally bigger rise in the shares of miners when the price of physical gold increases.

Furthermore, given that I’m talking about junior miners here, you’d expect to see an even bigger rise than more established, large gold mining companies, since the change in price will have an even bigger impact on their balance sheets. This bears out with the aforementioned single stock I hold, Pan African Resources, which climbs radically when gold prices spike.

In choosing between buying some more PHGP or GJGB, I decided to take a look at their relative performance, to help me decide if one is perhaps undervalued. So I pulled up some charts for these ETFs and had a look, comparing the changing price over a number of different time periods.

Since June 2017, via http://www.londonstockexchange.com.
Since August 2020, via http://www.londonstockexchange.com
Since February 2021, via http://www.londonstockexchange.com

The red line represents the physical gold ETF and the blue line depicts the junior miners ETF. As you can see over a 5 year, 1 year and 6 month timescale, the junior miners have underperformed physical gold. Although, as you can see, in times of significant price increases or drops, the junior miners show a bigger relative change compared to physical gold.

So I decided to add to my holding of GJGB. This does hold more risk that the less volatile and stable physical gold ETF, but if we are predicting more inflation, which to me seems to make sense, especially with an expected easing in QE, then I think I can make some profit here and hopefully protect myself against inflation more effectively.

My position in GJGB now has an average cost of £26.17 and I’m going to set a “time to review” price target of £34.02, representing a 30% upside, which I’ll reevaluate at year end.

Disclaimer

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