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Gold ETFs or Mining Stocks: Which Is the Better Bet?

By Helen Burnett-Nichols

NEW YORK ( Minyanville) -- It is no secret that the second quarter of 2012 is proving to be a tough one for gold. After climbing 4% in the first quarter, the SPDR Gold Shares ETF (GLD) is now up only 0.5% (to May 17) after briefly moving into negative territory, as bullion has continued its decline since late February.

Still, in its first-quarter Gold Demand Trends report released last Thursday, the World Gold Council reports that investment demand was the only sector of the gold market to register year-on-year growth in Q1, led by "solid demand" for ETFs and similar products. Indeed, the WGC reports inflows of 51.4 tonnes into the sector, with a value of $2.8 billion.

Earlier this year, Bloomberg reported that holdings of physical gold in ETFs have more than tripled in the last five years to 2,390.5 metric tons, at a value of around $137 billion. In February, Peter Miller, BMO Capital Markets' head of equity capital markets in Canada, told Bloomberg that gold ETFs have "been a huge hoover of capital and competition for the gold companies."

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Metals ETFs have also had a disappointing 2012, with the SPDR Metals and Mining ETF (XME) down more than 16% year-to-date, falling to its lowest level since last October earlier this month. Similarly, the Market Vectors Gold Miners ETF (GDX) is down 19% in 2012, while its junior counterpart, the Market Vectors Junior Gold Miners ETF (GDXJ) has fallen more than 24%. In terms of the stocks themselves, Newmont Mining (NEM) is down 24% this year, while Goldcorp (GG) has fallen 21%.

So, with both physical bullion and miners moving lower so far in 2012, does it pay to hold a gold ETF over a mining stock?

"If you're going to play in this field, I think you should stay with the gold itself because you know, the gold miners don't really outperform on the way up and on the way down, they fell even worse," says Donald Selkin, chief market strategist at National Securities.

Relative to the miners, Selkin says gold is less volatile. For example, while gold has tumbled 20% from its September 2011 high, Newmont Mining for example, has fallen 38% from its November high. Longer-term, he says, the gold ETF has completely outperformed individual equities such as Newmont and Barrick Gold (ABX), acting as a better hedge than the mining companies.
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