Investors have turned to gold in 2020 as a key portfolio hedging strategy against risks such as inflation, and financial market turbulence. Are gold stocks now a good investment to hedge your portfolio against the major economic and social disruption in 2020 from the coronavirus pandemic? Investing in gold can provide a hedge against both stock market volatility and market uncertainty.
Gold stocks often have poor fundamentals, but that’s where gold exchange-traded funds (ETFs) come in. In addition to smoothing out some of the risk of investing in general, some gold ETFs have gold as their underlying asset.
There is still a high uncertainty about the path of economic recovery in 2020 and beyond. Will the global economic recovery be a fast, V-shaped one, or a smoother one, a U-shape? Investing in gold, regardless of the recovery type, may be suitable during this pandemic, as for hedging purposes, gold is considered as a strategic asset.
In addition, a weak dollar is also providing support to gold prices. And until now in 2020 the U.S. dollar has been weak against another haven, the Japanese yen. So prolonged U.S. dollar weakness may provide support to gold prices, at least until the coronavirus pandemic subsides.
Should the stock market continue to be volatile, and further global risks arise, here are four gold stocks to consider to hedge your portfolio:
- Kirkland Lake Gold (NYSE:KL)
- SPDR Gold Shares (NYSEARCA:GLD)
- Aberdeen Standard Gold ETF Trust (NYSEARCA:SGOL)
- VanEck Vectors Gold Miners ETF (NYSEARCA:GDX)
Gold Stocks: Kirkland Lake Gold (KL)
This is the only gold stock in this article — the other options are gold ETFs. And there is much to like about this stock.
Unlike many other gold stocks, Kirkland Lake Gold offers investors both revenues and profits. It has revenue growth of almost 51% from 2018 to 2019, with revenue of $1.38 billion and $916 million in 2019 and 2018 respectively. There is also a lot of earnings-per-share growth. Also, there are five consecutive years of positive and increasing free cash flows.
The company has a very strong balance sheet with almost zero debt and a net margin of 36.22% for the trailing 12 months. All data is taken from MarketWatch and Gurufocus.
The good news continues, as back in mid-October 2020 Kirkland Lake Gold released gold production figures for the third quarter of 2020. It is noteworthy to mention that as mentioned in Zacks Equity Research “As of Sep 30, 2020, the company’s cash position surged 58% to $848 million. It also returned a total of $141.9 million of cash to the shareholders during the third quarter. The company also declared a 50% hike in its quarterly dividend to 18.75 cents per share, which is effective fourth-quarter 2020.”
Giving back cash to shareholders and boosting the quarterly dividend is very positive news, reflecting the optimism of the management about current and future business activities and financial performance. The forward dividend and yield are 75 cents annualized and 1.6% respectively. The dividend yield, while not excessive, could be considered attractive for income investors.
SPDR Gold Shares (GLD)
This is the largest physically-backed gold ETF in the world. The fund is benchmarked to gold bullion. This is an effective way for investors to get exposure to gold prices without the need to physically own the precious metal.
This gold ETF is structured in a trust that tracks the market price of bullion. It has an 0.4% expense ratio per year, or $40 per $10,000 invested annually. As of June 30, 2020, the Trust’s gold holdings market value was more than $67 billion.
Currently, the total value is about $77 billion and has a year-to-date performance of about 25%.
Aberdeen Standard Gold ETF Trust (SGOL)
With net assets of $2.6 billion, this is another large gold EFT, with a very attractive net expense ratio of only 0.17%. Another ETF that uses a trust for legal purposes. According to the fund details, “The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion, less the expenses of the Trust’s operations. The Shares are designed for investors who want a cost-effective and convenient way to invest in physical gold.”
The vault locations are in Zurich and London with a vault inspection frequency twice per year. The Custodian is JPMorgan (NYSE: JPM) and the Trustee is the Bank of New York Mellon (NYSE:BK). It has a year-to-date performance of 25%.
VanEck Vectors Gold Miners ETF (GDX)
With net assets of $16.8 billion and a large number of holdings — 53 reported on the fund’s information sheet — this ETF offers plenty of diversification benefits for investing in gold and more specifically in gold mining companies.
There is a dividend yield of 0.49% and is the only gold ETF mentioned in his article with a dividend yield. The year-to-date performance is about 31.9%. Among the top 10 holdings of this ETF are Newmont Corporation (NYSE:NEM), Barrick Gold Corporation (NYSE:GOLD) and Franco-Nevada Corporation (NYSE:FNV).
The expense ratio of GDX stands at 0.53%.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article.