Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

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

6 Critical Money Making Rules