Our current positioning is via gold miners rather than physical gold.
Investor concerns about the miners are misplaced when making a proper comparison taking all relevant factors into account.
There are two major reasons why long-term historical analysis comparing physical gold to miners is often flawed.
Firstly, there is a lack of accounting for dividend accrual on the miner side.
When you compare one equity market to another, or two individual stocks, it does not matter hugely as long as both have similar dividend payouts.
When comparing gold to gold miners, however, you are comparing a zero-payout asset to one with high cashflows, which becomes increasingly important as you extend the period of analysis.
Secondly, gold miners have a significantly different volatility profile to that of the metal.
The risk and potential return associated with gold equities is about 2.5x that of gold.
When interest rates are low, the opportunity cost of bigger position sizes is also low.
When rates are higher, taking a much larger position in physical gold (for example 25% net asset value) rather than a smaller, but risk-equivalent, position in gold miners (for example 10% NAV) sacrifices an extra 15% of portfolio assets that cannot sit in high-yielding bills.
Over the long term this adds up. When you correct for these factors and carry out a long-term analysis, the perceived structural outperformance of gold over the miners disappears.
