Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20
1. GOOGLE (Alphabet) - Primary AI Tech Stock For Investing 2020 - 17th Jan 20
ERY Energy Bear Continues Basing Setup – Breakout Expected Near January 24th - 17th Jan 20
What Expiring Stock and Commodity Market Bubbles Look Like - 17th Jan 20
Platinum Breaks $1000 On Big Rally - What's Next Forecast - 17th Jan 20
Precious Metals Set to Keep Powering Ahead - 17th Jan 20
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Sayonora to Gold Stocks - As money flows into Gold ETFS and Funds instead of Gold Stocks

Commodities / Metals & Mining Mar 28, 2007 - 12:31 PM GMT

By: Michael_K_Dawson

Commodities

I have sold at the bottom far more times than I care to admit.  However, if this is another occasion so be it - Sayonara, Au Revoir, Adios Gold stocks.

I purchased my first gold stock, Royal Gold, in May of 2002.  At the time, I really didn't know much about gold or gold stocks and had no idea that it was the beginning of a bull market in gold.  Royal Gold met the criteria of a screen that I was using at the time and it simply was one of many stocks that popped out.  The trade didn't work as I had hoped.  After a quick 20% haircut, I sold it three weeks later.  This didn't discourage me.  As I read more about gold, I realized that something special was in the makings.

The first part of 2003 wasn't much better.  I had more losses with Glamis Gold, Agnico-Eagle Mines (AEM) and Anglogold (AU).  However, around mid year my fortunes changed for the better.  The winners started coming 5%, 10%, 20%, 30%, 250%.  Yes, I turned a 250% profit on a trade of Golden Star Resources (GSS).  Needless to say, I was hooked at that point.


The beauty of Gold stocks is that they are leveraged to the price of gold.  Since a significant part of a gold mining company's expenses are fixed, their profits increase substantially as the price of gold increases.  Therefore, your profit potential is much greater than investing directly in bullion.  Obviously, there is no free lunch.  By purchasing the stock instead of the bullion, you are taking on company specific risk such labor disputes, environmental and political issues as well as just plain poor management. 

The graph below illustrates the relative performance of Gold stocks, as represented by the Philadelphia Gold and Silver Index (XAU), versus Gold bullion.

gold-v-xau.jpg

In this graph Gold is held constant, while and the relative performance of the XAU is illustrated.  As you can see, Gold stocks consistently outperformed Gold from 2002-2004 except for a few brief periods.

The next graph captures the same relationship from 2005 to date.

gold-v-xau-2.jpg

Since 2005, Gold Stocks have spent quite a bit of time underperforming Gold.  Also all of its peaks are lower than the ones from 2002-2004.  What happened?  Why have Gold Stocks lost their luster?

On November, 18 2004 the Gold bullion ETF (GLD) was launched.  I remember the excitement amongst the gold community - thinking that GLD would bring incremental buying from the mainstream since it was only a mouse click away.  However, immediately after the launch Gold stocks started selling off. 

Before GLD, the only way for many institutional fund managers to participate in Gold market was through mining stocks.  Most were prohibited from directly purchasing bullion.  I believe that many institutions no longer saw a need to hold a proxy for Gold when it could hold the actual commodity through GLD.  Why deal with the company specific risk? The loss of institutional ownership, I believe, is one of the primary reasons that Gold Stocks have lost much of its leverage to gold.

Losing its leverage is one thing, but out-right underperformance is something completely different.  I have heard all kinds of reasons.  The most common one is that Gold mining company's input costs have increased much faster than the price of gold.  That may be true, but oil is not the culprit.  From 2002-2004, oil increased an average of 33% annually versus 22% from 2005-to date. 

At this point, I don't know what the cause is for gold stocks underperformance and I really don't care.  What's the point of owning the stocks – if they can't outperform bullion?  Anyway, we are in the midst of a gold bull market – not necessarily a gold stock bull market.  So, why not do like the institutions and dump the Gold stocks for GLD? 

A better alternative to GLD may be the Central Fund of Canada (CEF). 

“Central Fund invests in gold and silver bullion and does not speculate with regard to short-term changes in gold and silver prices. As of October 31, 2005, on a physical basis, 50 ounces of silver were held for each ounce of gold held. During such time, Central Fund's net assets at market value of approximately $541 million consisted of 53.9% gold bullion and certificates, 44.5% silver bullion and certificates, and 1.6% cash, marketable securities and other working capital amounts.”

Let's take a look at CEF's performance versus gold and gold stocks.
gold-v-xau-3.jpg

The silver component in CEF provides the leverage that attracted me to the Gold Stocks without any of the company specific risks.  I have written on numerous occasions that I think CEF is the best way for the average investor to leverage the gold bull market.  Simple dollar cost average will generate outstanding returns.

Sayonara Gold stocks may be a little too harsh.  More than likely I will always trade a few gold stocks.  I enjoy speculating and the potential gains gives me something to talk about at parties. However, as an individual investor my bandwidth is limited. So, I have decided that the bulk of my money allocated for gold stocks will be vectored to CEF.  By employing

By Michael K Dawson
http://www.thetimeandmoneygroup.com/

Copyright © 2007 Michael K Dawson
Michael K Dawson founded the Time and Money Group with the aim of educating and sharing 20 years of experience on how to reach financial freedom. "Financial Freedom is freedom to focus on what is truly important to you and your family without having to trade time for a wage. It is enabled by a portfolio of income producing assets, managed by you, which generates sufficient income to cover your yearly expenses on an ongoing basis. It provides both time and money". The intent of his website is to become a repository of information to put you on the fast track to becoming financially free. For further infromation visit http://www.thetimeandmoneygroup.com/


© 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

6 Critical Money Making Rules