The case for blending gold with gold mining equities

Changes in the macroeconomic and geopolitical environment have made these assets more attractive

Gold and precious metals mining equities—as represented by the Philadelphia Gold & Silver Index or XAU—have suffered in the market downdraft along with other risk assets (down 20.3% year to date through March 17) after rising an impressive 52.9% in 2019.  They have outperformed the S&P 500 marginally so far this year and meaningfully over the past 12 months.  Changes in the macroeconomic and geopolitical risk environments have made both bullion and precious metals mining securities more attractive in the eyes of many investors.  Those seeking a non-correlated asset class that may provide differentiated return characteristics in volatile markets might want to consider blending their positions in gold with precious metals mining equities as a part of their overall portfolios.  

A more challenged macroeconomic environment and increased Coronavirus risk create a tailwind for gold and the gold miners.  A convergence of factors is pushing physical gold higher, which is generally good for the precious metals mining stocks.  Gold is a hard asset that tends to perform well in a slower growth environment when equity markets are facing higher volatility, geopolitical turmoil is brewing, real interest rates are stable or falling, and/or investors fear weakening currencies.  Many of these factors have been manifesting themselves concurrently in early 2020.  In addition, fears of a coronavirus epidemic have spooked investors, which has helped push the CBOE Volatility Index up over 500% in four weeks.  Gold tends to benefit during volatility spikes as investors seek safe havens.  At the same time, several other factors that tend to impact gold favorably remain in place, including easing monetary policies, fiscal stimulus, low to negative rates and lackluster economic growth.  This combination of factors helps to explain why the gold price is up slightly year-to-date through March 17 (after climbing 18.3% in 2019) while many other asset classes have been hit hard. 

With respect to gold and precious metals equities, the primary driver of their strong performance over the last year has been the rising price of gold and other precious metals.  Because the mining equities have both earnings and operating leverage to metals pricing, the gold and precious metals equities have historically outperformed the price of gold by twofold to threefold when both bullion and precious metals mining stocks are rising.  While that has not been the case year to date as investors have shed risk, it certainly has been true since gold made its decade low at $1,051 per ounce on 12/17/15, and it was also true in 2019 when the XAU Index outperformed gold by more than 2.8x.  (See Figure 1). 

But there are other reasons for the solid performance of miners as well.  The health of the precious metals sector is significantly better than during the last cycle—balance sheets are stronger, miners are generating cash and management teams are staying more disciplined in terms of both capital expenditures and acquisitions.  Regarding the latter, managements are pursuing sensible deals at fair prices using rigorous return metrics.  As a result, shares of acquiring companies are often trading higher upon the announcement of new deals.  Moreover, in the currently low production-cost inflation environment, efficient operators can capture significant margin expansion from even modest increases in the price of metals they produce.  In other words, higher quality operators have significant leverage to rising metals prices, and have benefitted greatly over the last five years as the price of gold has risen by more than $500 per ounce while major input costs have declined (e.g., oil, diesel, steel, copper, etc.) 

To be clear—we do not know whether the next $100 move in gold will be up or down—short term moves in precious metals are notoriously difficult to predict on a consistent basis.  In addition, leverage can work both ways; when precious metals prices fall, the mining equities may decline by even more.  We also recognize that ETF holdings of bullion and speculative positions in gold are relatively high on a historical basis.  What we do know is that multiple factors have come together this year to support gold and even push it higher.  We also know these factors are complex, varied and geographically dispersed—and what is good for gold is often very good for the gold mining equities. 

Figure 1: Performance of Gold Mining Equities vs. Gold
December 18, 2015 to January 31, 2020

Source: Morningstar Direct, 2/26/19.

What about combining gold with the gold miners?  There are several reasons why investors might consider blending positions in both gold and gold mining equities.  For investors with a constructive view on precious metals prices, gold and precious metals equities have tended to outpace the upside performance of bullion due to corporate operating leverage and amplified earnings.  Simply put, the defensive characteristics of gold blend well with the upside optionality of the gold equities.  In addition, while both gold and the precious metals mining equities have low correlations to traditional stocks and bonds, mining equities have even lower correlations to bonds than gold bullion itself, potentially making them attractive to investors seeking overall portfolio diversification.  Furthermore, precious metals equities offer investors access to dividends, mineral diversification and the opportunity to benefit from corporate actions, none of which is available by investing in physical gold.

Making room in a portfolio.  Gold and precious metals equities can be effective portfolio diversifiers and have the potential to deliver attractive total returns, but they are volatile, and sector timing is difficult.  Consequently, we favor a longer-term strategic allocation over a shorter-term tactical one.  Investors need patience to capture the total return potential of this asset class, and they need appropriately sized positions so that they can look beyond the day-to-day volatility of commodity prices and the price movement of precious metals mining stocks.  For investors who allocate 10%-20% of their portfolio to alternatives as they pursue diversification and non-correlated return streams, we believe a position in gold and precious metals equities should represent a component of that allocation. 

Investors seeking information about Invesco Oppenheimer Gold & Special Minerals Fund can find additional information here.


All data sourced from Bloomberg L.P. as of 3/17/20

1. The XAU Index has a correlation of 0.12 to the S&P 500 and 0.25 to the Bloomberg Barclays U.S. Aggregate Bond Index for the 10-year period ending 1/31/20.  The S&P GSCI Gold spot price has a correlation of 0.02 to the S&P 500 and 0.40 to the Bloomberg Barclays U.S. Aggregate Bond Index over the same period.  Source: Morningstar, 2/27/20.

Important Information

US equities are represented by the S&P 500 Index. An investment cannot be made directly into an index.

The Philadelphia Gold & Silver Index is an index of 30 precious metals mining companies that are traded on the Philadelphia Stock Exchange. Index performance includes total returns. The index is unmanaged, includes the reinvestment of dividends and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any fund. Past performance does not guarantee future results.

The mention of specific companies, industries, sectors or issuers does not constitute a recommendation by Invesco Distributors, Inc. Certain Invesco funds may hold the securities of the companies mentioned. A list of the top 10 holdings of each fund can be found by visiting

The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

To the extent the fund invests a greater amount in any one sector or industry, there is increased risk to the fund if conditions adversely affect that sector or industry.Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit

John Corcoran is a Senior Client Portfolio Manager for the Real Estate and Real Assets team.

Mr. Corcoran joined Invesco when the firm combined with OppenheimerFunds in 2019. Before joining OppenheimerFunds in 2011, Mr. Corcoran was a portfolio manager and senior equity analyst with Noble Partners, a hedge fund where he focused on commodities, energy, precious metals, and other sectors. Prior to joining Noble Partners, Mr. Corcoran was a portfolio manager for Brevan Howard Asset Management, a multi-strategy hedge fund. He has also held senior investment management positions at Fortis Investments, Harbor Capital Management, CIBC World Markets, and Stephens Inc. Mr. Corcoran has been in the asset management industry since 1997, focusing on portfolio management, fundamental research, business development, and product management. Before transitioning to investment management, Mr. Corcoran practiced law at Gibson, Dunn & Crutcher, where he specialized in complex business litigation for Fortune 500 clients.

Mr. Corcoran earned an MBA from Wharton Business School at the University of Pennsylvania, a JD from Boston University, and an AB degree from Harvard College.

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