Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold Stocks Continue To Disappoint

Commodities / Gold & Silver Stocks Sep 29, 2011 - 02:03 AM GMT

By: Bob_Kirtley

Commodities

Best Financial Markets Analysis ArticleThe recent major rally in gold is now experiencing a correction, so it is time to take a look at how gold stocks compared to a number of other gold trading vehicles. Quite frankly, it was abysmal. The argument that gold stocks are still the best gold trading vehicle is absolutely absurd. That being said, this article is in no way trying to discredit any gold mining, exploration companies or the efforts of the industry. The aim of this article is to simply show that gold stocks in general are unsuitable when trying to benefit from rising gold prices.


The main argument used when discussing the benefits of gold stocks is that higher gold prices equate to higher profits, however it is not quite as that simple. The reason it is not this simple is that in reality the costs of mining often increase with the price of gold. An example of this is the price correlation between gold and oil. Over the past ten years gold and oil prices have moved in sync leading to higher production costs. Also, if you are using gold stocks as an inflation hedge, then this will be offset by the fact that the gold producers costs will also be inflating. To top this all off, gold is getting much harder to find and much more expensive to extract when it is found.

Another argument is that gold stocks outperform the gold price. As we have seen in the latest surge in gold prices, gold stocks have not been able to keep up. This means that not only do they not outperform but they also fail to offer leverage to the gold price. Leverage used to be a good reason to invest in gold stocks before ETF's came along, however now they do not outperform and they do not offer leverage. In fact even if gold stocks offered leverage to gold this is not enough. Leverage is cheap in the modern financial world and easily created using margin or derivatives, even for the retail investor.

Some may argue that having a knack for picking potential boomers or undervalued gold stocks is a profitable strategy, however this is a completely different ball game. Picking undervalued companies if different from trading fluctuations in the gold price. At SK OptionTrader we use various option strategies to trade gold and we have been able to outperform other trading vehicles. http://www.skoptionstrading.com/...

After reading these arguments advocating gold stocks, one has to also look at the negative side. There are many risks you have to take into consideration when buying gold stocks. These risks include geo-political risk (Eg: Nationalisation of mines, disruption of mines due to conflict), managerial risk (Eg: Poor management decisions effecting stock price), labour risks (Eg: Labour cost increases and strikes), technical risks (Eg: problems with the deposit and difficulties mining), environmental risks (Eg: adverse weather and natural disasters) and tax risks (Eg: Negative changes in tax structures and higher royalties being imposed that hamper mining profits). We believe that the risks of owning gold stocks are not properly compensated by their performance when the price of gold is rising.

Regardless of the fundamental discussions above, the evidence against gold stocks is irrefutable. In May 2008 we first posted an article about the demise of gold stocks as a gold trading vehicle. One way to measure the true performance of gold stocks is to look at a Long Gold & Short Gold Stock (HUI) pair trade. If gold stocks were truly outperformers and a good investment vehicle then such a trade would have been disastrous.
http://www.gold-prices.biz/leveraged-gold-etfs-the-end-of-gold-stocks/

However since we wrote about the end of gold stocks such a pair trade would have resulted 58.65% gain (92.12% gain in gold minus 33.47% loss by short HUI position).

To further discredit the leverage argument, a Long DGP (200% leverage gold ETF)/Short HUI Index pair trade which would have resulted in a 127.35% gain (160.82% - 33.47%).

Gold stocks do not outperform and don’t even offer leverage.

If one is confident that the miners will outperform gold then one should be comfortable placing a Short Gold/Long Gold Stocks trade. Despite the many advocates for gold stocks, we do not know of any who have placed such a trade.

However, the difference between outperformance and leverage is vast. If you were to invest in gold stocks because it is slightly leveraged on the gold price then this reason is simply not enough. You can receive up to 400% leverage on ETFs by using margin and with this method you do not take on all the extra risks of gold stocks that were mentioned earlier in the article. To outperform, gold stocks need to go up by more than gold when gold prices rise, but fall by less when gold prices fall. By looking at the pair trades alone and forgetting all the other strong indicators, one can see that gold stocks simply do not outperform in this market, and haven’t performed for years.

In conclusion using gold stocks as a way to invest or trade in gold is a severely sub optimal strategy.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

DISCLAIMER : Gold Prices makes no guarantee or warranty on the accuracy or completeness of the data provided on this site. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This website represents our views and nothing more than that. Always consult your registered advisor to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this website. We may or may not hold a position in these securities at any given time and reserve the right to buy and sell as we think fit.
Bob Kirtley Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in