Gold bullion outshines mining stocks as a safe haven, study finds

If youre looking for safe-haven assets, dont mistake gold-mining stocks as a substitute for gold bullion, suggests a new study by two economic scholars.

In a paper titled Are gold bugs coherent? Brian Lucey of the Trinity School of Business and Fergal OConnor of York St. John Universitys Business School compare the relationship of gold bullion prices (measured by the daily closing price of COMEX 100 oz. gold) versus gold mining stocks (as measured by NYSE ARCA Gold Bugs index) from 1998 to 2015.

Their conclusions? This paper finds that gold prices in general lead the NYSE ARCA Gold Bugs index of gold miner share prices when we look at periods of one year or greater. This fits well with recent studies, such as OConnor et al. (2015), who have found that gold prices also lead gold mine production costs. Both sets of results imply that miners do particularly well in a rising price environment as the gap between costs and prices widens in their favor, and vice versa. However, as it is gold that leads the relationship, the ability of gold miners stocks to provide the diversification or safe haven benefits attributed to gold is again called into question.

Every investors core gold holding should be in physical bullion, not gold mining stocks, futures contracts, options, or even gold-linked exchange-traded funds. Physical gold is an asset thats always there when you need it; everything else is just a paper or electronic promise. Gold stocks and ETFs are not bad investments; on the contrary, the latter are useful as trading devices, while the former can offer even more leverage on a rising bullion price (if youve picked the right company). But one holds gold for its attributes as real physical asset that can serve as financial insurance and as a crisis currency. Mining stocks and ETFs pale in comparison to physical bullion in this respect.