Precious metals like gold, silver, platinum, and palladium have long been valued for their rarity, durability, and use in jewelry and industry. In recent years, precious metals have also become popular investments, especially during times of economic uncertainty when investors look to hard assets as a way to diversify their portfolios. For investors looking to get exposure to precious metals, exchange traded funds (ETFs) that track the price of metals and mining stocks of companies that produce metals are two common options.
How Precious Metal ETFs Work
Precious metal ETFs provide a way for investors to gain exposure to the price performance of gold, silver, platinum, palladium, and other metals without having to purchase and hold the physical metals themselves. The ETFs track the price of the metals using futures contracts and other financial instruments.
When an investor buys shares of a precious metals ETF, they are buying shares of a fund that closely mirrors the movements of the price of the underlying metal. The metals themselves are held in vaults and storage facilities by the fund custodian on behalf of the ETF shareholders. This structure allows investors to gain exposure to precious metals prices without having to buy, store, and insure physical bars and coins.
Most precious metal ETFs are structured as grantor trusts for tax purposes, meaning the ETF itself is not taxed. Instead, the tax liability passes through to the shareholders. When shares are sold at a gain, the profit is taxed as a collectible at 28% rather than the typical long-term capital gains rate. Investors will also owe taxes on any dividends paid by a precious metals ETF at collectible rates.
Advantages of Precious Metal ETFs
Here are some of the potential benefits of investing in precious metal ETFs:
- Diversification – Precious metals tend to be uncorrelated or negatively correlated to stocks and bonds. Adding a small allocation to precious metals can help diversify a portfolio.
- Hassle free ownership – A precious metals ETF allows exposure to metals prices without having to physically store or transport bars and coins. The metals are stored securely by the fund custodian.
- Liquidity – ETF shares can be bought and sold on exchanges just like stocks, providing daily liquidity. Physical metals may have to be sold directly to dealers or collectors.
- Lower transaction costs – Buying physical precious metals often incurs delivery, storage, insurance, and assay costs. ETF fees are typically a fraction of these expenses.
- Transparency – Precious metals ETFs publish their complete holdings daily, providing portfolio transparency.
- Exposure to price movements – ETFs eliminate concerns about counterfeit coins or getting fair value when selling physical metals. Investors get exposure to published benchmark prices.
- Ability to short – ETFs can be sold short, allowing investors to profit when metals prices decline. Shorting physical metals is extremely difficult.
- Intraday trading – ETFs trade throughout the day, allowing more trading flexibility than physical metal markets.
- Small investment amounts – ETFs allow easy investment in small dollar amounts compared to the large quantities physical metals require.
Disadvantages of Precious Metal ETFs
There are also some drawbacks associated with precious metal ETF investing that investors should be aware of:
- No possession of physical metals – Although ETFs track metals prices, investors do not actually own or possess the physical bars, coins, or bullion. Some investors prefer direct ownership.
- Tracking error – Differences between ETF performance and actual metals prices can occasionally arise due to fund expenses and other factors.
- Tax treatment – Profits are taxed at the 28% collectible rate rather than more favorable capital gains rates.
- Management expenses – Annual fund fees, though usually low, still eat into net returns over time.
- Share discounts/premiums – ETF share prices may trade at discounts or premiums to the net asset value (NAV) of the fund itself.
- Counterparty risks – Storage and transportation agreements between the ETF sponsor and third parties introduce counterparty risks.
- No dividend – Although physical metals may pay “storage dividends”, ETF investors do not receive dividend payments.
- Position limits – Large investors may exceed exchange limits on maximum open interest allowed in ETF futures contracts.
For many investors, the advantages of simplicity, liquidity and low cost will outweigh these limitations. But others may prefer direct physical metal ownership or select mining equities to gain metals exposure.
Leading Precious Metal ETFs
There are a variety of ETFs offering exposure to gold, silver, platinum and palladium:
SPDR Gold Shares (GLD) – The largest and most heavily traded gold ETF with over $50 billion in assets under management. GLD stores physical gold bullion in London and New York vaults and aims to track gold spot price performance using gold futures contracts. The fund charges a 0.40% expense ratio.
iShares Silver Trust (SLV) – The largest silver ETF with over $9 billion in net assets. SLV tracks the price performance of silver using silver futures and forwards. The fund charges a 0.50% expense ratio and stores silver bullion in vaults globally.
Aberdeen Standard Physical Precious Metals Basket ETF (GLTR) – Holds gold, silver, platinum and palladium bullion in fixed ratios and charges a 0.60% expense ratio. The Swiss-based fund has about $1 billion in total assets.
ETFS Physical Platinum Shares (PPLT) – Designed to reflect platinum spot prices, PPLT holds platinum plates and ingots in secure vaults. The ETF has close to $700 million in AUM and a 060% expense ratio.
ETFS Physical Palladium Shares (PALL) – PALL offers direct palladium exposure with physical palladium bullion held in Zurich and London vaults. The $220 million fund has a 0.60% expense ratio.
Sprott Physical Gold Trust (PHYS) – A Canadian closed-end fund that holds gold bullion. Unlike an ETF, shares are not always available and trade at a premium or discount to NAV. The fund has about $3.5 billion in assets and a 1.36% management fee.
These are just a few of the larger and more liquid precious metal ETFs available today. Investors looking for niche exposure also have access to small platinum and palladium ETFs as well as funds for individual miners and streamed royalty companies.
Evaluating Precious Metal Mining Stocks
In addition to ETFs backed by physical metals, investors can also gain exposure to precious metals prices through shares of mining companies. These stocks tend to exhibit high betas to underlying metals prices, acting as leveraged plays on gold, silver, platinum and palladium.
When metals prices rise, mining company revenues, earnings and cash flows tend to rise even faster due to operational leverage. The opposite also holds true – falling metals prices can hurt mining shares more severely. This leverage effect can allow well-selected miners to amplify gains in bull markets.
The major factors to evaluate when selecting precious metal mining stocks include:
Ore Grade Quality – A mine’s ore grade determines how much metal can be extracted per ton. High grade mines with pure deposits require less processing for the same metal quantities. Grade quality greatly impacts costs.
Production Costs – With all else equal, lower cost miners will tend to be more profitable at a given metals price than higher cost competitors. Individual and all-in sustaining costs are key metrics.
Mine Type – Underground mines often have higher costs than open pit mines. Continuous operations are easier to manage than batch intermittents. Mine depth, locations and geology all impact costs.
Mine Life – Long life reserves support stable forecasts while short life spans increase uncertainty. Expanding known reserves is key for miners with brief remaining durations.
Management Team – Skilled leadership with geology expertise and a track record of smooth operations suggests execution ability. Poor managers can impair value.
Financial Strength – Low debt levels, positive cash flow, and hedging provide staying power during metals price declines. Highly levered miners carry greater risks.
Geopolitical Factors – Operations based in stable jurisdictions are preferred over more volatile emerging market assets that face increased risks.
Access To Energy – Mining is energy intensive. Readily available low cost power enhances efficiency, while remote mines can see energy costs eat into margins.
Byproduct Credits – Some polymetallic mines produce other metals like copper or nickel in addition to gold and silver. These byproduct credits help lower costs.
Performing due diligence on these vital factors can help identify high quality, lower risk miners versus more speculative opportunities.
Major Precious Metal Mining Companies
The following mining companies are among the largest producers of precious metals like gold, silver, platinum and palladium:
Barrick Gold Corp (GOLD) – One of the world’s largest gold miners, Barrick operates mines across the Americas, Africa and the Australia Pacific region. Proven and probable reserves total over 92 million ounces of gold.
Newmont Corp (NEM) – Newmont has gold mining operations on three continents and attributable gold reserves of over 92 million ounces. The Colorado-based company is the top U.S. gold miner.
Franco-Nevada Corp (FNV) – Instead of operating mines, Franco-Nevada owns royalty rights tied to commodity production. This provides exposure to gold, platinum group metals and other resources without operating risks.
Wheaton Precious Metals (WPM) – Another royalty and streaming company, Wheaton provides exposure to low-cost mines operated by its partners. The stock offers leveraged upside to silver and gold.
Freeport-McMoRan (FCX) – A leading global copper miner, Freeport also produces significant quantities of gold, molybdenum and silver as byproduct from assets in North and South America.
Pan American Silver (PAAS) – Primary operations in Mexico, Peru, Bolivia and Argentina make Pan American one of the world’s top silver producers with 25 million ounces annually.
Hecla Mining Co (HL) – Hecla operates silver, gold and lead mines primarily across several western U.S. states. Roughly 50% of revenue comes from silver.
Sibanye Stillwater Ltd (SBSW) – Headquartered in South Africa, Sibyane extracts gold and platinum group metals from a geological formation known as the Bushveld Complex.
Kirkland Lake Gold Ltd (KL) – An emerging mid-tier gold producer based in Canada with mines in Ontario and Australia. Low all-in sustaining costs support solid profitability.
Risks and Volatility of Precious Metal Stocks
While mining stocks can generate impressive returns during metals bull markets, investors should be aware these stocks come with substantial risks and volatility:
- High operational leverage – Because costs are relatively fixed, small metals price changes result in outsized profit changes, magnifying volatility.
- Rising costs – Increased input costs for energy, labor, equipment can hurt profitability very quickly. Strikes and shortages also drive cost spikes.
- Production difficulties – Unexpected problems like ore grade declines, mine flooding, equipment breakdowns or accidents can severely impact output.
- Political risks – Mines in foreign jurisdictions face risks of nationalization, violated contracts, increased taxation, and instability from changes in government.
- Environmental regulation – Stricter emission rules, permitting delays, and environmental liabilities can hamper project developments.
- Financing risks – Developing a new mine can require billions in capital. Financing may not be available when needed.
- Exploration risks – Only a fraction of early stage projects eventually become operating mines. Exploration is prone to disappointing results.
- Commodity volatility – Mines can seem profitable at one metals price only to become marginal if prices slide, especially compared to budgeting assumptions.
While major miners tend to be lower risk than junior explorers, investing in metals mining still carries substantially higher risk than broader stock indexes like the S&P 500. Investors need to be aware of these hazards before allocating a significant portion of their portfolio to precious metal miners.
Tax Implications of Precious Metals Investing
There are several tax factors investors in precious metal securities need to consider:
- Collectibles tax rate – Gains on precious metals ETFs like GLD and SLV are taxed at 28% rather than the 0%, 15% or 20% long-term capital gains rates, reducing net returns.
- Pass through taxation – As grantor trusts, precious metals ETFs pass through tax liability to the shareholders. The ETF itself is not taxed.
- Dividends taxed as collectibles – Although most miners do not pay dividends, any distributions from precious metal stocks are taxed at ordinary income rates up to 28%.
- Depletion allowances – Miners can deduct a percentage of income as a depletion allowance to account for diminishing resource reserves, lowering the effective tax burden.
- Wash sale rules – Tax loss harvesting strategies do not work for precious metal securities. Losses cannot be claimed if repurchasing the same security within 30 days.
- State/local taxes – Some jurisdictions levy additional taxes on precious metals like sales tax on bullion purchases. State income tax also applies to gains and dividends.
Because of less favorable tax treatment, precious metals securities are often best suited for tax advantaged retirement accounts like IRAs and 401(k)s rather than standard taxable accounts. But while taxes should not drive the investment decision, having an awareness of the tax implications can help better plan which account types to utilize for these asset types when constructing an overall portfolio.
Outlook for Precious Metals Amid Economic Uncertainty
With rising recession risks, soaring inflation and ongoing geopolitical tensions in 2022-2023, precious metals ETFs and mining stocks offer a way for investors to potentially hedge risks in their portfolio. Here are some factors that could support rising precious metals prices going forward:
- Inflation hedge – If high inflation persists, hard assets like precious metals are likely to be sought as an inflation hedge.
- Market volatility – Equity market turbulence often increases haven demand for gold and silver. These metals tend to rise when stocks fall.
- Rising industrial demand – Economic recoveries boost demand for precious metals used in manufacturing, especially platinum group metals.
- Limited mine supply – Years of underinvestment have constrained the pipeline of new mines as lead times stretch over a decade. Output may fail to keep pace with demand.
- Weaker dollar – Dollar declines make gold and other metals more affordable for foreign buyers, increasing demand and prices.
- Central bank buying – Countries continue increasing strategic gold reserves to diversify from the dollar, adding to investment demand.
- Negative yields – $17 trillion of global debt carries negative yields, increasing storer-of-value appeal for metals that offer no yield but cannot have negative rates.
On the other hand, a deeper economic slowdown that crimps jewelry, industrial and technology demand could weigh on precious metals pricing. But with many catalysts that could send prices higher, precious metals ETFs and mining stocks may be poised to outperform if uncertainty persists and investors seek safe haven assets.
Constructing a Balanced Precious Metals Portfolio
For investors looking to build exposure to precious metals, a reasonable starting allocation might be 5%-10% of the total portfolio value spread across a mix of both ETFs and mining equities. Here are some guidelines for balancing a precious metals investment portfolio:
- Diversify metals – Consider at least two or three metals such as a gold ETF, silver miners, and platinum or palladium stocks. Avoid concentrating in just one metal.
- Blend ETFs and miners – Combining physical metal ETFs with mining stocks allows participation in price appreciation while reducing company-specific risks.
- Focus on quality miners – Look for experienced management teams, low costs, investment grade credit ratings, and operations in stable jurisdictions. Avoid excessive risk.
- Control position sizing – Given volatility, keep individual positions limited to 5% or less of the total portfolio value. Rebalance when position sizes drift.
- Review correlations – If your stock and bond holdings already have high precious metals correlations, you likely do not need substantial separate metals allocations.
- Utilize tax-advantaged accounts – Place metals ETFs and stocks in IRAs or other accounts that defer or minimize taxes to maximize returns.
- Monitor closely – Given volatility, invest time keeping up to date on macro conditions driving metals price action and individual company developments.
Revisiting allocations at least annually and rebalancing when price movements skew weightings ensures disciplined portfolio management. With prudent diversification and risk control, precious metals can play a valuable portfolio role as a diversifier and inflation hedge.
Precious metals like gold and silver have emerged as popular alternative investments in an uncertain economic environment marked by high inflation, market turbulence, and geopolitical instability. For investors seeking exposure, precious metal ETFs offer a low cost and efficient way to gain access to daily price movements through funds backed by physical bullion. The leading gold and silver ETFs provide liquidity and transparency when trading in a brokerage account.
Meanwhile, shares of mining companies can exhibit leverage to underlying metals prices, amplifying gains in rising markets. By targeting fundamentally sound miners with high ore grades, low costs, and operations located in stable jurisdictions, investors can potentially realize substantial gains during metals bull markets. Yet mining stocks are volatile, so position sizes and risk management are critical.
Constructing a balanced portfolio that blends physical metal ETFs with mining equities can allow participation in metals upside while reducing risk. An allocation of 5-10% may be reasonable for diversification purposes depending on an investor’s goals and total asset levels. Within this strategic allocation, maintaining diversity across metals, vehicle types, and individual issuers is key to mitigation overconcentration.
With prudent portfolio construction, disciplined rebalancing, and risk management, precious metals can play a strategic role for investors seeking assets that can maintain value across market cycles. But metals investing differs fundamentally from stocks and bonds, so education, research and continuous learning are essential to become an informed investor in this sector.
Frequently Asked Questions
Here are answers to some frequently asked questions about investing in precious metal ETFs and mining stocks:
Are precious metal ETFs a good investment?
Precious metal ETFs can be a good investment for diversification purposes and as an inflation hedge. Holding a small allocation (5-10%) of gold and silver ETFs can provide non-correlated exposure and downside protection during stock market volatility. They are fairly liquid, low cost, and provide convenient metals exposure without physical storage needs.
What is the top gold mining stock?
Some of the current top gold mining stocks by market capitalization include Newmont Corporation (NEM), Barrick Gold Corp (GOLD), Franco-Nevada Corp (FNV), and Wheaton Precious Metals (WPM). Each major gold miner has different risk profiles and cost structures, so investors should analyze individual company merits.
How can I buy gold mining stocks?
Gold mining stocks can be purchased through normal stock brokerage accounts. Some leading gold miners pay dividends, so gold stock funds and ETFs can also provide exposure. Examples are GDX, SGDM, RING, GDXX. Research the major gold miners and consider investing in a basket to mitigate company-specific risks.
Are silver stocks better than silver ETFs?
Silver mining stocks can provide greater upside when silver prices rise, but also tend to suffer larger losses during market slumps. Silver ETFs like SLV have lower risk and more directly track the silver spot price. Blending silver stocks and ETFs allows participating in upside while limiting downside.
What are the most undervalued mining stocks?
There is no consensus on the most undervalued miners currently. Investors need to conduct their own due diligence. Potentially promising gold miners with recent stock slumps could include Barrick Gold, Kirkland Lake Gold, and Centerra Gold. Always research before investing.
How do I research a mining company stock?
Key aspects to research when analyzing mining stocks include proven reserves, production capacity, ore grades, operating costs, debt levels, management expertise, and risk factors like political instability in the region. Visit company websites and read earnings reports, presentations, and technical filings to make informed decisions.
Can precious metals decline in value?
Yes, precious metals prices can decline, sometimes significantly. Gold and silver fell over 40% in 2013 after sharp run-ups. Metals do not go up indefinitely. Monitor fundamentals driving prices, adjust holdings accordingly, and do not overextend precious metals allocations.
In summary, precious metals ETFs and stocks carry risks like any investment, but can provide portfolio diversification when owned prudently. Conduct thorough research and rebalance over time. Consider consulting a financial advisor when building exposure to this sector.
In another related article, How to Buy Physical Gold With a Gold IRA