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Gold miners: do they improve your portfolio? [Members]
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Thanks @TA fascinating to see the contrast with pure play gold.
If people are interested in wider mining / materials information and in fact the modern world generally I really recommend Ed Conways book Material World…
https://uk.bookshop.org/p/books/material-world-a-substantial-story-of-our-past-and-future-ed-conway/7545098
Thanks for this TA.
It’s a pass from me. I already hold 15% Physical Gold ETF in my SIPP and it looks like that does a better job.
I’ve been snipping bits off when my Gold hits highs – nothing rules based, just when I feel I could redeploy into another defensive asset, like now, cos I know I’ll howl when gravity reasserts itself. Know thyself – I don’t like (too much) tracking error compared to a vanilla 60:40 so that’s why I ditched commodities. After all, everything should only ever go up, right?
Btw, “gold is just an unproductive lump of rock that doesn’t generate cash flow”. My chemistry teacher would like a word.
Hmm getting plausibly convinced that I maybe should consider some diversification into this asset class. However is this a case where market timing does matter i.e. better buying in when gold is in a bear market to get the real volatility dampening?
@Brod – “After all, everything should only ever go up, right?”
Heh, heh, right! 🙂
@BBBobbins – the problem I ran into with gold is that the bear market didn’t arrive on cue. I kept monitoring the price of physical gold for just such an opportunity but the price kept going up. In the meantime, I retired and the need to diversify beyond equities and bonds became ever more urgent. In retrospect, I shoulda just pound-cost averaged in.
@AndyJ – cheers for the book rec, looks fascinating. You might be interested in The Knowledge which also explores how civilisation springs from the materials around us – although the premise of the book is quite different.
A beautifully researched and eloquently expressed piece @TA. Thank you as always.
Gold/gold miners are an anti-investment. They’re not bought primarily for cash flows or capital growth, their value may increase when traditional assets decline, they resists financialisation and economic optimism, and they often attract those with a more sceptical or defensive outlook. It’s investment-as-insurance (per Bernstein), and not investment-as-ownership or for growth. Fear over hope. Preservation of capital over seeking prosperity. All diversified investors should probably have some (5% min). There’s even case for going full Harry Browne for the most risk adverse All Weather Portfolios.
It’s surprising (at least to me) how poorly the miners have done (for B&H fixed % allocations) versus just holding the metal itself. They have operating leverage, but, on the whole, that has hindered their return profile.
If mixing miners into the gold allocation (maybe 3% gold/2% gold miners) it might make sense to only buy this form of informal ‘portfolio insurance’ when it’s cheap. This in turn would mean departing from a price insensitive, purely passive approach & forming judgements on if, when and to what extent:
– Gold miners are cheap compared to gold (e.g. market cap gold miners / value of above ground gold)
– Gold miners are cheap to their own history (e.g. sector CAPE)
– Gold is cheap compared to equities (e.g. the famous Dow 30/Gold ratio, using which one buys equities below 5, and sells gold, and buys gold above 15, and sells equities, and between 5 and 15 you do nothing).
Not for me, these days. I did though make some money long ago, the 80’s, by investing in Consolidated Gold Fields, and and North Kalgurli. Not that I knew what I was doing. A 19th century ancestor, a Cornish tin miner, emigrated to Australia during one of the downturns in tin, and made his fortune at Ballarat. So really, it was the attraction of the names that did it for me..
Thank you, great article – are the annual return figures real or nominal?
@SkinnyJames — Cheers! As per the ‘investing sidebar’ note:
Thank you – missed that!
Tom Wilson in the FT:
“Marathon [Fusion]’s proposal is to also introduce a mercury isotope, mercury-198, into the breeding blanket and use the high-energy neutrons to turn it into mercury-197. Mercury-197 is an unstable isotope that then decays over about 64 hours into gold-197, the only stable isotope of the metal.”
This was covered by another poster in the comments to the W/e links.
Over at Abnormal Returns (22nd July) they ask, in light of this, whether gold could head the same way as manufactured diamonds:
“If you were involved in the diamond business in 2016, and knew how the market for manufactured diamonds would mature over the next decade, you may have done things very differently.”
It looks decades away (fusion is always 30 years in the future, after all 😉 ) – if ever, and if at all.
But, then again…
Should this affect having a strategic allocation of 5% to gold and/or gold miners for ‘rebalancing bonus’ purposes?
Platinum and silver look cheap still compared to their historic price ratios to gold (I hold a little of the former, together with some palladium, via ETNs), and silver miners (for which there’s also an ETF, as for both gold and junior gold miners) then offers operating leverage (but with doubtlessly more volatility).
Thanks for that DH. Could the alchemists crack it at last? 😉 It’s an interesting question, though: how diversified do you need to be?
Invest in one precious metal or all of them?
Invest in domestic government bonds or global?
Invest in the US or the World?
Invest in crypto, private equity, private credit?
Personally I think there’s a limit to how much complexity each of us can stand.
There’s a weird effect I think, where sub-5% asset allocations act more as mental sop than as a genuine position that’s likely to make much difference to your overall return.
Potentially a performance-chasing problem too i.e. we invest in the asset class de jour.
I’d be interested to know if other precious metals are genuinely diversifying, or whether, for example, their industrial utility increases their correlation to the stock market?
The diversification versus diworsification distinction might come down to the cost of insurance.
If asset #1 is massively below its historical average price ratio to asset #2 then it’s much more likely to diversify adverse price moves in asset #2 than if it’s trading at well above that average.
Would I have brought gold to diversify stocks in 1980/1981 when the Dow 30/Gold ratio hit 1.29x, it’s lowest ever?
No. The insurance of gold was overpriced. It would likely diworsify.
But in 1999/2000, when the ratio was over 44x?
Then yes, the insurance was cheap, and worth buying.
Holding a fixed percentage of any potentially diversifying asset regardless of relative prices between assets makes no sense.
It’s the trap bondholders fell into when yield to maturity went negative.
As, say, by way of an example, the 0.125% 22/03/2073 Index-Linked Gilt shows, buying hoped for diversification at a price of £400 per £100 par (real terms) value upon first issue of the bond in October 2021 was not wise, and I would say prospectively obviously such; whereas buying it now at £48ish for £100 par real value could well be an acceptable cost of insurance.
I wouldn’t pay £10,000 p.a. to insure my house, but I’d bite the insurer’s hand off to pay £100 p.a.
Looks like the alchemy is a little less remunerative than first posted – about 3 tonnes gold per 1.5 gigawatts per year (p. 14, and it’s radioactive for years):
https://www.marathonfusion.com/alchemy.pdf
On the diversification role of gold, just surfacing from a deep dive into a (impractical, as weekly asset rotation) system using only BTC (for declining real rates, increasing liquidity phases in the economic cycle), UPRO (a 3x S&P 500 LETF – 3LUS is the UK equivalent)(for low and falling VIX, and positive trend and momentum over different time series) and gold (for falling $ strength). No bonds as a risk off. Just gold being used for that purpose. IRL if you diversify you really have to cover the disinflation/deflation part of the quadrant somehow, and that means long bonds. Still, I can see the logic for gold.
Miners make up just 1% of the global equity markets and gold miners even less.
Perhaps there could be some scope for active management alpha generation given poorer price discovery / less market efficiency and even greater than normal dispersion between different mining companies? Therefore, might a specialist gold miner IT work better than an ETF?
@DH – Love the way you put this: “IRL if you diversify you really have to cover the disinflation/deflation part of the quadrant somehow, and that means long bonds.”
How significant a threat do you think deflation is on the smorgasbord of investor unpleasantries? I tend to downweight it but I’m interested in your view.
Re: gold miners – I haven’t looked into it in any depth but there does seem to be a significant difference between the various gold miner funds on offer (and PME vehicles on top of that). It’s not like choosing between a dead-heat of S&P 500 trackers. Junior gold miners being one clearly demarcated segment that looks even wilder than their senior counterparts.
DH, I’ve not asked you before but what is your overarching investing objective? Or does your portfolio reconcile multiple / competing requirements and interests?
Thank @TA. In answer to your concluding questions:
– Although I look down before I look up, long term I’m more motivated by seeking gains than avoiding losses. I still hate losses though. Who doesn’t? But I can stomach volatility if I have conviction.
– Got flooring from FSS (legacy) and CARES (current) DB. Bond like with inflation protection.
– Very nearly 50, and looking at either PT/Part Retire at 55 (and taking 25% tax free lump sum from SIPP, and then recycling it into either ISA and/or VCT over number of years, and holding in low coupon, short duration ILGs in the meantime) or (God forbid, but all too likely) ending up just keep going FT to 60.
– Hope to avoid accessing both SIPP (other than for lump sum) and ISA until 75.
– ~£550k in SIPP + little over 600k in ISA, both nearly all in global equities or ‘equity adjacent’ (with a bit of TF, and some other wild cards). Just >100k in GIA, almost all (following liquidation of a HYP, after the former £5k p.a. dividend and £12,300 p.a. CGT allowances both got progressively slashed) now in low risk-short duration, low coupon ILGs, but also with legacy holdings of not especially successful capital preservation ITs, and one of RCP (deep underwater), the latter brought with exquisite bad luck just before the interest rate reset of 22/23 (which hammered it, can’t bring myself to sell / crystallise loss).
– Mortgage paid. House £600-700k.
– Mrs DH running about half my ISA+SIPP totals, but with no GIA.
– Until I can persuade her, as my better half, to leave UK for somewhere LCOL and lower tax (e.g. Italy, Greece, Malta and Cyprus all have attractive rates of IT on foreign source pension income for non domiciliary residents, and Bosnia has a low flat tax with no CGT) want to try, AFAP, to increase amounts sheltered in ISA/SIPPs.
– No kids, so no IHT considerations.
P.S. I don’t think going forwards that deflation is going to be a bigger risk than stagflation myself, but if near future AGI comes for all the PMC jobs (redundancy payoff, wheheey 🙂 ) then surely that’s more deflationary (indeed recessionary, with low interest rates) than the possibility of a tech led productivity ‘explosion’ leading to higher (market) interest rates to adjust for the higher returns to, and on, capital.
So, *if* an investor choses broad cross asset diversification, then they can’t then just leave out long duration high quality government bonds. Of course, they might choose not to diversity, at least to that extent.
@DH – thank you for sharing. I’m sorry for the delayed reply – I’ve been away from my post.
You seem to be in an excellent position and I am ever so pleased for you. Especially given how much thought you put into everything – it seems like your efforts have paid off handsomely.
What would compel you to continue until 60? I don’t mean to be nosey but it seems as though ‘early release’ would be your preferred scenario but you’re somewhat pessimistic about your chances.
Thanks @TA.
Thing is, it’s such easy money – work I mean. At a 3.25% SWR, £50,000 p.a. from work is like having an extra £1.5 mn in the SIPP or (given the more favourable tax treatment of withdrawals) say £1.3 mn in the ISA.
And once you’ve done something work wise for 25 years then most things you’ve already seen before and can navigate on autopilot.
I’m not a high earner. The next 12 months I’ll scrape just below £80,000 gross earned income (albeit with a proportionately good CARES DB scheme).
But I can take everything over £50,270 p.a. and SIPP it for the HR relief, and then decide to use savings (now more and more held in near zero coupon short duration gilts in GIA) to either fund the ISA or make a VCT contribution (the latter for the 30% tax relief, meaning a £20,000 VCT contribution set against IT at 20% BR from £12,570 to £50,270 can neutralise four fifths of the IT charged on income up to £50,270).
Where I’ll be well and truly screwed is if HMT decide in the near future to cap SIPP relief at less than the highest nominal IT rate paid and/or reduce the AA from £60,000 (because of the deemed PIA, for AA purposes, on the DB scheme’s incremental accruing benefits).
If that happens, then the economics of working on FT look way less attractive.
If I can’t SIPP contribute at full IT relief rates on the HR tranche of income then I’m at best working 58% for myself and 42% for HMG.
That’s not a good deal, even if the work is subjectively rather less stressful and demanding that 25 years ago (both because I’m more senior these days, and because I at least hope that now I more or less know what I’m doing, which, frankly, I didn’t when I started).
Tbh on the investment side I’m just full of regrets, looking back now, at not taking more risk sooner.
I should have started in 2002/3, which was a bigger green light for transformative quality tech disruption than even 2008/9.
I should have brought BTC in 2015.
I hate crypto (and crypto bros even more), but I looked at the aftermath of MtGox (I first started following BTC in 2013, at the time of the Cypriot banking fiasco) and thought a point might come when it represented an attractive risk to payoff ratio for a 0.5%-1% punt.
I was looking at it in 2015 at below £200 equivalent per coin and thinking of 10 coins.
But I didn’t pull the trigger and (yet again) the price side of the opportunity then completely ran away, making it exponentially less attractive.
That could have been an extra £600k now for 10 coins after 24% CGT.
It’s one set of missed opportunities after another 🙁
“It’s one set of missed opportunities after another”
Heh, you’re not alone in feeling this way.
On another thread, you mentioned the importance of an ex-ante, rules-based framework that can assist investment decision-making. Do you have a parallel framework that can help you decide when to call it quits at work? Or is there no need?
No, but if this whole ‘AI’ malarkey pans out as I think it just might (see “AI 2027”) then, in 10 to 20 years or so, retirement planning might I fear become academic as we’ll all be:
– Unemployed
– Rich
– Dead
With either of the first 2 states potentially preceding the last.
LLMs aren’t the risk here, but they aren’t the end game of this either. There are many other avenues, and now ‘progress’ of sorts has been made, the deluge of Capex into this area dramatically increases the likelihood (risk?) that more successful routes to AGI and then recursive ASI are (recklessly) taken.
If intelligence and consciousness are inevitably emergent then, unless alignment is fully solved, and only if ASI doesn’t have any ‘instinct’/tendency for self preservation and dominance; things will likely end quite badly, one way or other.
Owning productive invested capital is a way, of sorts, with all its limitations, to try to ensure that – in a less than extinction level scenario – there’s some sort of protection against rampant unemployment and inequality which the automation of all paid mental (and perhaps soon thereafter all physical) labour appears to necessitate.
It’s the ultimate expression of the rate of return on capital being perpetually greater than the return to labour which Marx first warned of the consequences of.
Perhaps as we age we fear little more than the destruction of the system we understand and from which we’ve profited.
@DH – I wanted to debate your “AI could change everything” proposition but I didn’t have the time.
Turns out someone else has said it all already, far more eloquently than I could:
https://freddiedeboer.substack.com/p/the-rage-of-the-ai-guy
The opening and final thirds are particularly strong. Not sure why the writer bothered to pick a fight with Yascha Mounk in the middle.