Yamana Gold Inc. (USA) (AUY), Goldcorp Inc. (USA) (GG): Ignore ETFs, Look at Gold Miners

There is a misconception that the price of gold is driven solely by investor demand, but this is not the case. According to the World Gold Council in the second quarter of 2013, just 12% of gold demand came from investors. Thanks to strong interest from jewelry buyers and other actors, this precious metal will provide many investing opportunities over the next decade.

Look past the hype

It is natural that investors like to talk with other investors. For gold investors this holds a hidden danger. In the second quarter of 2013, ETFs and similar products saw outflows of 402 tonnes, equal to 47% of total net gold purchases for the quarter. Total investment demand was boosted by coin and gold bar purchases, leading to positive net investment demand, but strong ETF outflows leave the impression that the sky is falling.

Total gold demand has taken a hit; as of the most recent quarter it is 17% under its five year average. Still, this 17% reduction is far less than the massive ETF outflows that have been seen recently. Even as many ETF investors fled the market, central banks, jewelry buyers, and the technology industry have helped to stabilize total demand. The gold market is multifaceted, and going forward the financial markets will just be one part of the demand equation.

Where to invest?

ETFs like the SPDR Gold Trust (ETF) (NYSEMKT:GLD) are some of the most popular gold related securities. The problem is that these are a poor fit for the long-term investor. All the trust does is buy gold, lock it away in a room, and then offer you ownership of said gold.

SPDR Gold Trust (ETF) (NYSEMKT:GLD) is a good way to play short term price trends. For long-term investors looking for a dependable return on their investments, it is important to note that this trust pays no interest. In theory the price of gold will keep up with the rate of inflation and maintain the value of your investment, but this is not guaranteed. The below chart shows how starting in 1996, it took a full 10 years for the change in the price of gold in U.S. dollars per U.K. troy ounce to catch up with changes in the U.S. consumer price index.

UK Gold Price data by YCharts

Gold miners

Yamana Gold Inc. (USA) (NYSE:AUY) is a better way to grab a piece of the gold market. The company has already declared its third quarter $0.065 dividend, providing income for investors. It has a number of mines in Brazil, Mexico and Chile. Its Brazilian Pilar mine just came online, and this will help to boost the company’s production in the coming years. The company’s balance sheet is clean with a small total debt-to-equity ratio of 0.11.