Gold vs. Gold Stocks

This is a popular discussion among hard asset investors: whether it is better to own physical gold or gold stocks. You will often hear that gold stocks provide investors 3X leverage to the price of gold as a justification for owning stocks over bullion. Personally I have not seen this over the last 10 years. If you take a look at a few charts you will see that bullion has outperformed gold stocks to the upside without the dramatic declines. This was particularly evident in 2008 where gold at its worst fell 35% off its highs but then quickly rebounded and hit a new all time high in 2009. However, the stocks fell between 75-95% (juniors falling the most) in 2008 and have failed to hit a new high in 2009-2010. Many of the juniors and explorations companies are still down 50% from their all time highs reached in 2006-2007.

Here are a few charts to better visualize this situation.



You can see that gold stocks have really disappointed compared to bullion. The real question is why? The only reason I can find is that the miner's operating margins have not expanded with the rising price of gold. Instead they have remained flat to slightly down because of the dramatic increase in energy prices. As most people know, mining is an energy intensive business and rising energy prices have prevented the gold miners from delivering their expected 3X leverage to the price of gold. If this situation continues, gold miners will continue to lag gold.

However there are still opportunities in the gold mining industry. I like gold royalty companies such as Royal Gold and Franco-Nevada because they pay an upfront fee to mining companies for their future production and get a nice stream of cash for years. I also like project generators who joint venture their projects to other companies which helps reduce capital expenditures and dilution. A few companies I am currently looking at are: Mirasol, Miranda Gold, Eurasian Minerals, Midland Exploration, and AuEx Ventures, and Lara Exploration.

In conclusion, if you are looking for stability and safety then gold is the better choice. However if you are a really good stock picker and market timer then gold stocks are for you. Personally I like the idea of having 10% of my portfolio in physical gold as insurance and trading gold stocks. I really can't stand the extreme volatility of the stocks to buy and hold them for the long-term.

Black Swan Insights

10% of my portfolio is in physical gold 0% in gold mining stocks

Legal Disclaimer:

I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset. (I know this is a stupid statement but for legal purposes I have to say it. Thanks)


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