WPM - The RING Gold Miners ETF: Reaching For Bright Shiny Objects

2024-01-08 06:13:15 ET

Summary

• I advise all medium and high net-worth investors to have exposure to precious metals as a hedge against inflation and geopolitical and financial dislocation.
• Today, I will analyze the iShares MSCI Global Gold Miners ETF as a potential inclusion in a well-diversified portfolio to gain exposure to precious metals.
• The conclusion reached is similar to my past Seeking Alpha articles on "paper gold" assets: buy gold & silver coins instead. I'll explain why in this article.

Most of my followers know the virtues of building and holding a well-diversified portfolio through the market's up-n-down cycles and that, as part of such a portfolio, I advise all medium and high net-worth investors to have exposure to precious metals as a hedge against inflation and to guard against significant geopolitical and financial dislocation. Today, I'll take a look at the iShares MSCI Global Gold Miners ETF ( RING ) to see if it might make sense for inclusion into your portfolio.

Investment Thesis

Whenever I think of gold as an investment, I am reminded of the following anecdote:

Back in the early 1900's, a U.S. minted 1 ounce gold coin had a face value of $20. At the time, $20 was enough for a man to buy a nice suit and a shirt, tie, belt, shoes, and top-hat to go with it. Today, what would a $20 bill get you? Maybe the belt? Yet the 1 ounce U.S. gold coin (currently worth $2,184 ) could, you guessed it, still buy a nice suit, shirt, tie, belt, shoes, and top-hot.

The moral of the story is, of course, that gold is a store of wealth and a hedge against inflation. It is also protection against a rapidly deflating currency, as those in Germany found out during both World Wars I & II.

Today, the world has two on-going wars (Russia/Ukraine and Israel/Gaza) and high tension between the U.S. and China over Taiwan. Meantime, former U.S. Secretary of the Treasury Larry Summers recently characterized the coming U.S. presidential election as the most vital and consequential election since World War II . The point is: the current environment of geopolitical risks are arguably the highest they have been in decades.

And this is why I recommend all medium and high net-worth investors have some exposure to precious metals (particularly gold) ... and the higher the net-worth of the individual, the larger the allocation to gold should be (i.e. they have much more to lose). It could be as little as 2-3% for some investors, and as high as 10-20% for the very wealthy.

With that as background, let's take a closer look at the RING ETF to see if it is a good way for you to get exposure to precious metals like gold and silver.

Top-10 Holdings

The top-10 holdings in the RING ETF are shown below and were taken directly from the iShares RING ETF webpage , where investors can find more detailed information on the fund:

The #1 holding is Newmont ( NEM ) with a 20.9% weight. Newmont is one of the largest gold producers in the world with a large inventory of proven and probable gold reserves. As the slide below from a November presentation shows, NEM expects to produce 5.3 million oz of gold this year, as a relatively attractive AISC (all-in sustaining cost), while also having significant of copper, silver, lead, and zinc production:

At one point I recommended and owned Newmont for its anticipated dividend growth and the potential for strong total returns if gold went higher. However, I changed from a BUY to a HOLD in the Fall of 2021 (see Gold Isn't Working ). I actually sold my NEM shares prior to that article, but the stock keep moving higher so I rated it a HOLD. However, in retrospect I should have lowered my rating all the way to SELL because the stock has under-performed the S&P500 by ~20% since that article was published. Indeed, despite the big rally in the stock market last year, NEM stock is down 21% over the past 12-months. It currently yields almost 4%.

Barrick Gold ( GOLD ) is the #2 holding with a 13.7% weight. Like NEM, Barrick is also a leading global producer of gold and copper, but its demonstrated revenue growth and estimated revenue growth going forward has been relatively tepid over the past few years:

GOLD stock is down 6.9% over the 12-month and currently yields 2.3%.

Agnico Eagle Mines ( AEM ) is the #3 holding and back in October the company said gold production will come in at the high-end of guidance after Finland restored a mine permit. More recently, Agnico made a ~C$23 million investment in Canada Nickel Company ( CNC:CA ). AEM yields 3% and is down 3.5% over the past year.

The rest of the top-10 holdings have single-digit percentage allocations in gold and diversified precious metals miners like Wheaton Precious Metals ( WPM ), Kinross Gold (KGC), and Gold Fields ( GFI ).

From a geographic perspective, the RING ETF has the vast majority of exposure to relatively safe assets residing in Canada, the U.S., South Africa, Australia, and the U.K.:

This diversified asset base gives some level of protection from foreign currency exchange risks.

Performance

The performance of the RING ETF has been, in a word, terrible:

As you can see, the 10-year average annual return is 4.5%, while since inception the annual average return of the RING ETF is strongly negative . That being the case, the 10-year opportunity costs of owning RING versus the broad major indexes (the S&P500, DJIA, and Nasdaq-100), as represented by the ( VOO ), ( DIA ), and ( QQQ ) ETFs, has been massive:

Risks

The risks of owning precious metals miners is considerable: high gasoline and diesel costs pressure margins, gold & silver prices generally don't keep up with global economic growth, and gold company CEOs have arguably been poor stewards of capital because they keep pushing on the growth string by making large acquisitions that are supposed to unleash significant shareholder value which typically don't turn out as well as expected (and sometimes significantly worse. For example, NEM closed the acquisition of Goldcorp for $10 billion of shareholder capital back in January of 2019, yet 5-years later, the stock price has barely budged:

Lastly, the expense fee of the RING ETF is a relatively high 0.39%. While this is somewhat typical of funds that hold foreign equities, I would be remiss not to point out that 0.39% is a whopping 36 basis points above the expense fee of the VOO S&P500 ETF (and yes, I know I am mixing asset classes here, still the point about expenses is valid in my opinion).

Summary & Conclusion

As I have mentioned in many of my articles on gold and silver with respect to building and holding a well-diversified portfolio, my advice for investing in precious metals is - instead of investing in gold and silver equities like the RING ETF - to simply buy (and hold ... forever ...) U.S. minted gold and silver coins from reputable sites like APMEX.com or Kitco.com. Sure, you pay for shipping and insurance costs, and you have to store the coins (silver in particular can be a heavy and bulky asset, even only a few thousand dollars worth). However, you have it in hand (or should at least have it close by ..), whereas "paper gold", a category that includes mining stocks and ETFs, is just that: paper. If there were an actual financial collapse that significantly impacted the stock market, you might find out that your "safe gold investments" weren't so safe after all.

Meantime, note that the RING ETF has not even kept up with the price of gold, as represented by the SPDR Gold Trust ETF ( GLD ) - a relatively straight in-line proxy on the price of spot gold - over the past 5-years:

Point being: don't chase or reach for bright shiny objects: I rate the RING ETF (and most gold producing stocks as well...) a STRONG SELL. Instead, investors should move the proceeds into gold and silver coins instead. The coins are something that, once you meet your desired allocation level, you simply put away and forget about them. They are a SWAN investment wherein you know that the protection is there if you ever need it. And, over time, gold does appreciate ... and that has been true since time immemorial.

On the other hand, "paper gold" assets require constant monitoring because they are volatile and can move quite rapidly with geopolitical, foreign currency, acquisition, and mine closure/disruption developments. But the biggest reason to exit "paper gold" assets is because the majority of them have awful long-term performance track records in comparison to the broad market averages. For example, the graphic below shows the opportunity costs of holding the top-3 stocks in the RING ETF versus the broad market indexes over the past 10-years:

So, SELL the RING ETF and buy yourself some U.S. minted gold & silver coins. Keep them forever and hand them down to your heirs.

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