Including gold stocks to your gold allocation has the potential to boost returns while maintaining the portfolio diversification benefits of gold.
In a rising gold price environment, gold stocks have the potential to provide additional returns because:
- The value of unmined gold reserves increases, making gold companies more valuable to investors
- The profitability of gold companies can rise exponentially relative to the price increase for gold
Let’s look at an example of a company producing 1 million ounces of gold a year:
For illustrative purposes only.
In this illustration, an 18% increase in the price of gold translates into an 80% increase in profitability for the company.
Whatever the portion that gold represents in your portfolio, allocating 20% of it to gold stocks may improve the overall return potential. Let’s look at the historical returns during the three most recent gold market rallies.
|Gold Rally #1 –
||In the December 2000 to February 2008 gold rally, including gold stocks generated significant value, providing
over 100% of incremental performance.
|Gold Rally #2 –
||Following the 2008 financial crisis, adding gold stocks failed to generate incremental returns – the returns of
gold and gold stocks were atypically comparable.
|Gold Rally #3 –
||Starting on January 1, 2016 to December 31, 2017, having 20% of your gold allocation in gold stocks would
have resulted in cumulative performance of 37.27% compared to 26.22% if you just held gold.
Past performance is not indicative of future results.
Historically, gold stocks entail greater risk and price volatility than gold bullion.