It’s been a good year to own gold.
Thus far in 2016, the iShares S&P TSX Global Gold Index Fund (TSX:XGD) has soared, increasing more than 85% as the price of gold finally started performing again after posting decline after decline since peaking in 2011.
The ETF is stuffed full of the world’s largest gold stocks. Newmont Mining, its top holding at 13.3% of assets, has gone up 118.9% so far this year. Barrick Gold and Goldcorp, the second and third-largest holdings of the fund, are up 126.1% and 33.2%, respectively.
Goldcorp has underperformed its peers as the company has struggled with a number of company-specific issues, including unexpected production issues from its largest mine in Mexico. Without Goldcorp weighing down the ETF, results would have been even better.
XGD is the perfect ETF to own when gold heads higher. Gold miners are particularly leveraged to the price of gold because of operational leverage. If fixed costs to run a mine stay the same at say $1,000 per ounce of production but the price of gold increases from $1,100 to $1,200 per ounce, profits effectively double even though price of the commodity hasn’t really done much at all.
Ultimately, the performance of XGD comes down to the price of gold. If the yellow metal continues heading higher, investors will be very happy they own it. But if gold falls, the underlying miners will fall more, leading to much more disappointing results compared to investors who bought the commodity itself.
