December 7, 2023

An Undervalued Gold Stock That Could Double In Price

Leveraged earnings gains from rising gold prices have historically resulted in gold stocks outperforming gold bullion.   From 2000 to the highs of 2008, the PHLX Gold/Silver Index (XAU) rose by 345% compared to a 252% increase in the price of gold.

Over the past two years, the out performance of gold stocks has come to a dead halt despite the surge in gold prices.  From $1,121.50 in January of 2010, gold has advanced to the current price of $1,781.10 for a gain of $659.60 per ounce or 58.8% while gold stocks have basically flat lined as represented by the Market Vectors Gold Miners ETF (GDX).

The divergence between gold bullion and gold stocks has resulted in a markdown of world class gold producers, resulting in the best buying opportunity since the 2008 sell off.  John Hathaway, who runs the Tocqueville Gold Fund and has the best track record in the industry recently said this in his Investment Update.

Gold and gold stocks appear to be bottoming in the wake of a four month correction which began in mid -August when the metal peaked at $1900/oz. Bearish sentiment is at extremes not seen in many years. This and a number of other indicators, such as stocks that have been hit by negative sentiment, the downtrend in gold prices since August, and tax loss selling, support our view that a rally lies ahead. This very bullish market set-up, in our opinion, mirrors the extraordinary investment opportunity of the despondent year end in 2007. Even though gold prices have been declining for several months, they finished the year with substantial gains. This suggests that the value represented by gold mining equities held in our portfolio could be extraordinary.

GDX - couresy

Gold price - courtesy

Will the glaring price disparity between gold and gold stocks continue?  I have argued in a previous post (see Gold Stocks are Positioned For An Explosive Move Up) that major gold producers with large proven gold reserves are on the bargain table.  The steeply discounted value of gold stocks will ultimately result in gold stock prices surging as the fundamentals of gold stocks are recognized by investors.

The gold stocks most likely to outperform are the ones with the strongest current relative price strength.  One gold stock that fits this criteria and has outperformed the gold stock indexes is Yamana Gold (AUY), a Canadian gold producer.


Yamana has producing, development stage and exploration properties in Chile, Mexico, Colombia and Brazil.  The Company recently announced record fourth and year end results for 2011.  Highlights of Yamana’s performance for 2011 are shown below.

  • Gold production increased by 5% to 916,284 ounces
  • Silver production reached 9.3 million ounces
  • Revenues increased by 29% to $2.2 billion
  • Cash margin increased by 28% to $1,517 per ounce
  • Earning increased by 59% to $713 million equivalent to $0.96 per share
  • Cash flow increased by 48% to $1.3 billion
  • The annual dividend was increased to $0.20 per share
  • The Company’s net earnings were equivalent to $497 per ounce with an average realized gold price per ounce of $1,670.
  • Yamana has industry low cash costs and operates in stable areas
  • Yamana management forecasts that annual sustainable gold production will increase by over 60% to 1.75 million ounces by 2014

Gold prices have surged thus far in 2012 and there is every reason to believe that gold will end the year far higher than its current price (see Fed Lays Groundwork For Price Explosion in Gold and also Why There Is No Upside Limit for Gold and Silver Prices).

The stage is set for an explosive move upwards in Yamana’s stock price based on the confluence of higher gold prices, soaring profits and increased gold production.   Based on the fundamentals, Yamana’s stock is dirt cheap.  The stock is on the verge of breaking out to a new all time high and could easily double in price during 2012.


Are Gold Investors Nuts?

How many of the countries best financial advisors are telling their customers to invest in gold?  Despite the fact that gold has gone up for the past eleven years, a Barron’s survey shows that gold remains distinctly out of favor by mainstream investment advisors.

Barron’s interviewed 51 of the countries most successful investment advisors from each of the fifty states plus the District of Columbia.  Although investment returns were not disclosed, Barron’s selected the best investment pros based on the amount of assets managed, revenues generated, gain in the number of clients and the quality of their practices.

The 51 pros selected by Barron’s are the best in the business, work hard, serve wealthy sophisticated clients and manage hundreds of billions of dollars of wealth.  According to the survey, the most common investment strategy of the top financial advisors was to generate income flows and potential capital gains by owing high quality blue chip stocks.  Most of the advisors were optimistic, predicting that dividend paying stocks would outperform government securities on which yields have plunged to all time lows.

Of the 51 advisors interviewed, only two specifically recommended a small portfolio allocation into gold.  The investment advisor from Iowa recommended that clients make “sure 3% to 5% of their portfolios are in gold” and the investment pro from Nebraska suggested a 10% position in gold mining stocks.

The number of investment pros recommending gold was surprising low, especially after considering the potential for another financial meltdown precipitated by sovereign debt crises, rampant money printing by central banks and towering levels of debt that threaten to crush the world economy.

Gold - courtesy

Gold has proven to be a vehicle for wealth preservation over thousands of years and is insurance against financial disaster.  Has the increase in gold since 2000 already fully discounted the worst possible economic and financial scenarios?

Barron’s smart money pros apparently think that gold’s run is over.  Are gold investors nuts to argue with the world’s best money managers, especially after an almost 7 fold increase in the price of gold since 2000?  What do you think?

More on this topic: Gold Bull Market Could Last Another 20 Years With $12,000 Price Target

Lowering Gold Stock Portfolio Risk Through Diversification

There are numerous investment strategies available to capitalize on the gold bull market.  Gold investors have the option of investing in gold bullion, gold coins, gold ETFs, gold mutual funds and individual gold mining stocks.

Although many gold investors prefer to exclusively hold physical gold, diversifying into selected gold stocks can dramatically increase total returns.  Although gold stocks as a group have recently underperformed bullion, selected gold stocks have outperformed gold bullion.

Well managed gold mining companies with large ore reserves and increasing mine production have provided investment returns far in excess of the gain in gold bullion as seen below with the examples of Randgold Resources (GOLD) and Gold Resource Corp (GORO).  Both of these gold mining companies have vastly outperformed gold bullion when compared to the SPDR Gold Trust (GLD) which tracks the price of gold bullion.

GORO, GOLD vs GLD - Courtesy

Selecting the gold stock that will outperform bullion is difficult, however, as seen by the lagging performance of the PHLX Gold/Silver Sector (XAU) when compared to the GLD.  The XAU Gold/Silver Sector is a broad based index of sixteen large precious metal mining companies.  The GLD has outperformed the XAU by three times since 2009.

GLD vs XAU - courtesy


As with any stock portfolio, diversification is required into order to avoid the risk of under performance.  An example of the risk of holding a gold portfolio with only a small number of stocks was seen today when the price of Nevsun Resources (NSU) collapsed by almost 31% after the company unexpectedly announced that gold production will plunge by nearly half in 2012 due to a reduction in estimated gold reserves.

Since selecting individual gold stocks can be a daunting task for investors, a better alternative would be to invest in an actively managed gold stock mutual fund with a proven record of superior investment returns.  Past performance has shown that an actively managed gold stock mutual fund has outperformed passively managed gold index funds.

One gold fund that should top the list for investors to consider is the Tocqueville Gold Fund (TGLDX), run by legendary gold investor John Hathaway.  The Tocqueville Gold Fund has a remarkable average annual return over the past ten years of 23.3%, almost double the gain in the Philadelphia Gold/Silver Index.


Although gold bullion has outperformed gold stocks since 2008, Mr. Hathaway’s outlook for gold remains extremely bullish and he expects that as gold continues to increase in price, gold stocks should once again outperform the returns of gold bullion.  In his latest Investment Update, here is what Mr. Hathaway had to say.

Gold and gold stocks appear to be bottoming in the wake of a four month correction which began in mid -August when the metal peaked at $1900/oz. Bearish sentiment is at extremes not seen in many years. This and a number of other indicators, such as stocks that have been hit by negative sentiment, the downtrend in gold prices since August, and tax loss selling, support our view that a rally lies ahead. This very bullish market set-up, in our opinion, mirrors the extraordinary investment opportunity of the despondent year end in 2007. Even though gold prices have been declining for several months, they finished the year with substantial gains. This suggests that the value represented by gold mining equities held in our portfolio could be extraordinary.

Disarray in Europe is, in our opinion, a slow motion version of the global market meltdown in 2007. It appears to us that the U.S. Fed is once again acting as the lender of last resort to European central banks in their efforts to save the euro. As in 2007, U.S. sovereign credit will be substituted for failing credits, in this case, peripheral European states. The fig leaf to justify such action on the Fed’s part is sado-fiscalism, or extreme austerity packages administered by technocrats. Tough restraints on profligate public spending, which has become a way of life in all Western democracies, will not go down easily. These measures are deflationary and will be ultimately met by howls of protests from mobs demanding renewed money printing and deficit spending. In our opinion, the fundamentals for gold are stronger than ever because the outlook for paper currencies is dire. The difficult correction of the last four months has shaken out all but the strongest holders, a perfect set-up for advances to new all-time highs in 2012.

There’s No Reason Gold Stocks Should Be So Cheap – Newmont Mining On The Bargain Rack

Over the past five years, gold bullion has dramatically outperformed the average gold stock.  Reasons why bullion has outperformed gold stocks include an investor preference for physical gold and the inability of gold miners to produce earnings gains commensurate with the increase in the price of gold.

The end result of investor aversion to gold stocks has resulted in many quality gold stocks, such as Newmont Mining (NEM), winding up on the bargain rack.  Newmont Mining is one of the world’s largest gold producers that has positioned itself for profitable growth after restructuring its operations.  Newmont Mining management is forecasting a 35% increase in gold production to 7 million ounces annually over the next six years.

Revenue growth at Newmont has grown by 10% annually over the past 10 years.  Earnings per share increased from $.45 per share in 2002 to $4.68 per share in 2010.  For the year ending December 31, 2010, gross margins hit a record 61%, cash holdings increased to $4.1 billion and revenues climbed by 23% to $9.5 billion.  Newmont Mining has a dividend yield of 2.3% with a very low payout ratio of 18% and is committed to increasing the dividend in line with the increase in the price of gold.  Newmont’s total proven and probably gold reserves of 93.5 million ounces are valued at only $285 per share.

Newmont Mining - courtesy yahoo finance


In this week’s Barron’s Roundtable, analyst Fred Hickey talks about Newmont Mining and why he is bullish on gold.

Hickey: Newmont Mining [NEM], which I recommended last year, outperformed. [The stock rose 5.5% through Dec. 30.] The driver is gross margin expansion. Gold prices are up by a factor of six through this bull market, yet costs have roughly doubled. The company has had tremendous cash flow, leading to dividend increases. Newmont has tied its dividend policy to the gold price. If the price rises, you are guaranteed more dividends. The money won’t be wasted on bad acquisitions. In 2008 Newmont earned under $2 a share. It could earn $4.82 for 2011, and $5.96 in 2012. There’s no reason these stocks should be so cheap.

As Felix has said, owning physical gold is important. In addition, you can own gold through exchange-traded funds, such as the GLD [ SPDR Gold Shares]. They are audited. The U.S. government’s gold holdings haven’t been independently audited in decades. The GLD charges fees of 0.40% of assets. The IAU, or iShares Gold Trust, charges only 0.25% of assets. It trades for about a hundredth of the price of gold, so it is selling for $15.76 a share. It has been around since 2005 and has $9 billion in assets and 171 tons of gold. It stores its gold in vaults around the world. Last year I recommended stocks. This year I like the GDX, or Market Vectors Gold Miners ETF. It gives you diversification with 31 names, including a few silver stocks. Barrick Gold [ABX], Newmont and Goldcorp [GG] account for 41% of assets. At some point gold stocks will outperform bullion.

Newmont is currently selling at a steep discount to the underlying value of its gold reserves.  As the price of gold continues to rise, the stock will eventually reflect the fundamentals and could easily double from current levels.

Major Buy Signal For Gold And Why Stock Markets Are Ignoring Predictions Of Economic Collapse

Predictions that the global economic system will collapse have been coming at an accelerated pace lately.  Usually, many of  the most extreme scenarios are from sources more interested in gaining publicity rather than offering a balanced analysis.

What’s unusual is that lately, many of these apocalyptic predictions are coming from some of the most normally sedate institutions in the world such as the IMF and the World Bank.

Central bankers and the heads of world financial organizations usually speak in oblique and obfuscated terms designed to convey confidence.  Either the financial powers are writing a new book of rules or we are all headed for some unimaginably horrific scenario of financial and social chaos.

Here’s a small sample of the latest warnings from the sedate and not so sedate.

IMF Chief Warns Europe Must Fuel Growth

BERLIN—The head of the International Monetary Fund warned that in addition to cutting yawning budget deficits Europe needs to do more to promote growth and stop the crisis from spreading to the world economy.

“It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand,” IMF Managing Director Christine Lagarde said before the German Council on Foreign Relations. “A moment, ultimately, leading to a downward spiral that could engulf the entire world,” she said.

World Bank Projects Global Slowdown

“Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time,” said Justin Yifu Lin, the World Bank’s Chief Economist and Senior Vice President for Development Economics.

Developing countries have less fiscal and monetary space for remedial measures than they did in 2008/09. As a result, their ability to respond may be constrained if international finance dries up and global conditions deteriorate sharply.

“An escalation of the crisis would spare no-one. Developed- and developing-country growth rates could fall by as much or more than in 2008/09” said Andrew Burns, Manager of Global Macroeconomics and lead author of the report. “The importance of contingency planning cannot be stressed enough.”

Feliz Zulauf Sees More Trouble Ahead

Felix Zulauf: Yes, I believe the peripheral nations have entered recession territory, and I believe it will get worse.

So, the situation in Europe will get worse before it gets better. Moreover, the ECB, which has its roots in the German Bundesbank, will see to it that the ECB does not become the lender of last resort until they are absolutely forced into it by the market. For investors, this is very important to understand. The new leader Mr. Draghi may leave Trichet’s conservative path, however, as since he is in power he has talked one way and acted in another way. This is delicate as the credibility of the ECB could be lost quickly.

Euro Breakup Would Cause Global Meltdown

In his speech at Davos, Soros will say it is “now more likely than now” that Greece will formally default in 2012, Newsweek said. Soros nevertheless thinks the euro will survive, according to Newsweek.

The world is facing a period of “evil,” Soros said, adding that he foresees Europe descending into chaos and conflict, while rioting in the streets of the U.S. will lead to a curtailment of civil liberties and the global economic system possibly collapsing altogether, Newsweek reported.

All of the risks to global prosperity mentioned above have been well known by investors for months now.  The day the IMF Chief warned of a global depression worse than the 1930’s, the Dow Jones yawned and drop by 10 points.

Is there a major disconnect from reality by U.S. investors or has the worst already been discounted after the steep stock market sell off last August?  Ever since an inside out day on October 3 of last year, the Dow Jones has powered higher, ignoring all the bad news and warnings of Armageddon.  Exactly what is going on?


Dow Jones - courtesy

The answer is positive for both stocks and gold.  The “collective wisdom” of the markets saw a resolution to the imminent threat of the European debt crisis last fall, and that resolution is known as quantitative easing.  As previously noted in this blog last December, Every Solution To the Euro Crisis Involve Printing Money, which is exactly what happened.  Both the European Central Bank (ECB) and the Federal Reserve stand ready to print whatever quantity of money is required to paper over the European and U.S. debt crisis.

The massive first phase of the ECB’s Long Term Refinancing Operation advanced about $780 billion to Europe’s insolvent banking system, buying time and postponing the day of reckoning.  The ECB will hold a similar operation in February.

Long term this does little to solve Europe’s fundamental problems, but is short term bullish for stocks and extremely long term bullish for gold and silver.



Bearish Gold Forecasts Suggest Soaring Gold Prices In 2012

Will gold soar this year as central banks go wild with money printing?  Or will gold collapse as debt defaults overwhelm the system and propel the world economy into a deflationary black hole?

Members of this week’s Barron’s Roundtable were asked what they thought about gold.  Panel members offered their usual variety of informed opinions on what could happen to the price of gold during 2012 – here’s what they had to say.

Marc Faber, editor of the Gloom, Boom & Doom Report, expects massive money printing by central banks during 2012 and a continuing correction in gold prices.

The worse the news gets, the more the U.S. and the European Central Bank and China will print money.
In the past 10 years gold and silver have performed superbly. The gold price overshot on the upside when it reached $1,921 an ounce on Sept. 6. Now it is in a correction phase and could fall another $200.
It is not that the gold price will go up. It is that the value of paper money will go down. Diversification is important, and people should put 15% to 25% of their assets in gold.

Brian Rogers, Chief Investment Officer of T. Rowe Price, sees oil as a good investment but does not foresee a big rally in gold prices.

It is easier to get your arms around oil than gold in terms of the numbers and demand.  Oil is a good investment in the next few years, with optionality to the upside if something extreme happens in the Middle East. Gold is a good diversifier, but not a great way to make money.

Fred Hickey, editor of The High-Tech Strategist, predicts higher gold prices this year and views gold stocks as a relative better value than gold bullion.

Gold will rally, then have a seasonal selloff. By the end of the year it could be up 15%, as has been typical in this 11-year secular bull market for gold.
Gold stocks have been terrible. They dropped 20% last year, so that makes them a better buy relative to the price of gold. Last year I owned a lot of gold. Now I have more money in gold stocks than in physical gold or the GLD [ SPDR Gold Trust].
I own a smaller amount of exploration companies through the GDXJ [ Market Vectors Junior Gold Miners exchange-traded fund] and a larger percentage of producers.

Felix Zulauf, President of Zulauf Asset Management, sees gold prices soaring as the world economy approaches depression like conditions, forcing central banks to print money on a vast scale.

The world economy will experience a brutal slowdown. Deflationary forces are going to strengthen and commodities in general will decline. You can buy oil to hedge a decline in base metals. Gold started a cyclical correction within a secular bull market last summer. The first wave of selling is ending now. Gold has to be bought some time this year, probably in the second half, below $1,600. Then the monetary authorities will load their guns again and print more money, which will make investors buy more gold. The gold market is so tiny that when people want to shift just a small piece of their wealth into gold, the price flies to new highs.

Scott Black, President of Delphi Management, favors a modest position in gold stocks but thinks that people holding gold as a hedge against inflation are misguided.

A lot of people own gold as a hedge against inflation. I don’t see inflation in the cards in the U.S. Capacity utilization in the manufacturing sector it is only 77%. We own a couple of gold stocks but buy them as we do other stocks. We look for high returns on equity and low P/Es. We own Barrick Gold [ABX], which trades for 7.8 times this year’s expected earnings. Even absent a big upswing in gold prices, it will do well because production is growing.

Putting things into perspective, the rather lukewarm endorsement for gold by the Barron’s Roundtable should be viewed as a bullish indicator for gold prices.  The healthy and normal correction in the price of gold from the high of $1,900 in August has resulted in rampant bearishness and numerous predictions that the bull market in gold is over.  Ironically, many of the most bearish gold forecasts are coming from the same “analysts” who were predicting the end of the gold bull market multiple times over the past decade.

Bearish sentiment on gold has reached extreme levels according to the Hulbert Gold Newsletter Sentiment Indicator.  The average gold timer has thrown in the towel.  Over leveraged speculative investors panicked at the first sign of weakness in gold and sold out.  According to Hulbert, “this is building a strong foundation for a fresh assault on gold’s recent all-time high above $1,900 an ounce.”

Bearish sentiment on gold stocks has also reached extreme levels as seen by the Gold Miners Bullish Percent Index.



After briefly falling below the 200 day moving average, gold rebounded strongly, rising from $1,598 at the start of the year to a Friday closing price of $1,635.50.  Over the past decade, the few times that gold previously fell through the 200 day moving average  set the groundwork for a major price advance.



The fundamental and technical indicators for gold remain rock solid.  Gold may very well wind up shocking the bears by outperforming every other asset class in 2012.

How Did An Investment Pro Lose Money Investing In Gold?

Despite the recent set back in gold prices due to panic selling by investors, gold has still racked up an impressive 15.7% gain with a price increase of $218 per ounce since the first of the year.  So how does a hedge fund manager with one of the best track records in the industry wind up losing over 10% on his gold portfolio?

The man who can answer this question is John Paulson, famous for his billion dollar gains betting against subprime mortgages before they collapsed in price.  Making matters even worse, the set back in Paulson’s Gold Fund, although painful, pales in comparison to losses run up by the Paulson Advantage Fund, as reported by Bloomberg.

John Paulson, the billionaire money manager mired in the worst slump of his career, lost 10.5 percent in his Gold Fund this year even as the metal heads for its 11th straight annual gain, according to people familiar with the fund’s performance.

The fund, which invests in mining stocks and other gold- related securities, remains the best performer in Paulson’s $28 billion fund family this year. His Paulson Advantage Fund, which seeks to profit from corporate events such as takeovers and bankruptcies, has fallen about 35 percent. The performance numbers for the two funds are from Dec. 28, 2010, through Dec. 20, 2011, and may not reflect returns for all shareholders, said the people, who asked not to be identified because the information is private.

Paulson & Co., based in New York, has lost money this year on investments including Citigroup Inc., Bank of America Corp. and Sino-Forest Corp., the Chinese forestry company accused by short-seller Carson Block of overstating timberland holdings. Paulson, 56, cut the so-called net exposure in his main hedge funds to 30 percent last month and reduced bullish bets across all his funds.

Paulson’s frustrations with the losses on his gold portfolio mirrors that of other investors who have bet on gold stocks and lost despite the fact that gold bullion scored another impressive advance this year.

Paulson’s had large positions in Anglo Gold Ashanti (AU), Gold Fields Ltd (GFI), Nova Gold Resources (NG), Agnico-Eagle Mines (AEM), Iamgold Corp (IAG) and Barrick Gold Corp (ABX), all of which declined.  Agnico-Eagle Mines was the worst performer with a stunning decline of over 50% on the year.

It will be interesting to see if Paulson dramatically reduces his positions in gold mining shares over the coming quarters.  Given the fact that the fundamentals for owning gold are stronger than ever and gold mining shares are deeply oversold, it would not be surprising to see Paulson actually increase his gold stock holdings.

Chinese Seek To Buy Undervalued Gold Mining Company

China has been steadily adding to its gold reserves as it attempts to diversify its huge holdings of foreign currency.  From only 395 tonnes in 1988, the Chinese central bank has increased its gold reserves to 1,054 tonnes.  As the largest foreign holder of U.S. Treasury debt, the Chinese have complained loudly about America’s addiction to debt and the nonstop efforts of the Federal Reserve to debase the U.S. dollar.

Besides buying ever increasing amounts of gold bullion, the Chinese have now decided to add gold mining companies to their shopping list.  Given the incredible disconnect between the market value of gold mining companies compared to the value of gold bullion, the decision to buy gold mining companies should come as no surprise.   Many gold mining stocks are selling at a substantial discount to their net asset values of proven gold reserves.

As reported by Bloomberg, China’s second largest gold producer, Shandong Gold Group Co, Hunts for Brazilian Gold Acquisition.

Jaguar Mining Inc. (JAG), which is exploring its options after receiving acquisition proposals, is proving that even a record takeover premium for a gold company can be a bargain.

Shandong Gold Group Co., owner of China’s second-largest gold producer, offered to buy Jaguar for $785 million in cash, two people familiar with the deal said Nov. 16. The $9.30-a- share bid is 77 percent more than Jaguar’s prior 20-day average, the highest premium in a cash takeover of a gold miner greater than $500 million, according to data compiled by Bloomberg. Jaguar is still trading at a 3.5 percent discount to its net asset value, cheaper than 94 percent of comparable gold miners.

“Relative to their peers, Jaguar is trading at a pretty substantial discount,” Sachin Shah, a Jersey City, New Jersey- based special situations and merger arbitrage strategist at Tullett Prebon Plc, said in a telephone interview. “Even a $9.30 offer may be undervaluing the company. They could actually get a longer-term value asset at a cheap price. It’s the Brazilian assets that make Jaguar so appealing.”

After closing at $7.80 in New York on Nov. 16, Jaguar fell 3.5 percent yesterday to $7.53. The company is trading at 0.97 times its net asset value of $7.80 a share, based on the average of analysts’ estimates compiled by Bloomberg. That means it’s still cheaper than 16 of 17 other gold companies with similarly sized mines, the data show. Jaguar’s rivals are worth an average of 1.8 times the value of their underlying assets.

“The stock has lagged the group and generally underperformed, and as a result the company was ripe for the picking,” Mark Kellstrom, a senior partner at Summit, New Jersey-based Strategic Energy Research and Capital LLC, which focuses on energy and natural resources, said in a phone interview. “For a purchaser like Shandong, there’s a real opportunity here to buy gold reserves at cheaper valuations, improve the operating results and therefore reap a nice return.”

It was simply a matter of time before cheap gold mining companies became acquisition targets.  Gold mining companies have lagged far behind the gains of gold bullion and are selling at huge discounts to the value of their gold reserves.  A look at the comparative performance of the SPDR Gold Trust (GLD) to the PHLX Gold/Silver Index (XAU) shows that since 2008, gold has returned approximately 200% compared to a return of only 50% for the XAU.

The fundamental appeal of gold mining stocks is further bolstered by increasing demand for gold bullion.  The Gold Demand Trends released by the World Gold Council shows that global demand for gold increased by 6% in the third quarter.


Courtesy yahoo finance

Despite the recent volatility in gold prices, the long term fundamental case for gold remains intact and, in fact, grows stronger by the day as one sovereign nation after another stares into the abyss of debt default.  The move by the Chinese to acquire Jaguar Mining could be the spark that sets off a stampede to acquire undervalued gold mining companies.

Gold Stocks Vastly Outperform Gold On The Week – Will The Trend Continue?

For the week ending October 14, gold continued to rally, gaining $26 on the week to $1,678.00 as measured by the closing London PM Fix Price.

Gold stocks, by comparison,  dramatically outperformed the gain in bullion by almost fourfold.  In order to get a broad based assessment of relative performance, gold was compared to the XAU, GDXJ and TGLDX.

The XAU or Philadelphia Gold/Silver Sector is a broad based index of sixteen large precious metal mining companies, the GDXJ or Market Vectors Junior Gold Miners tracks small and medium cap gold and silver miners and the TGLDX  or Tocqueville Gold Fund is a diversified gold stock fund with one of the best track records in the industry.

A summary of gold compared to the XAU, GDXJ and TGLDX for the one week period ending October 14th is shown below.

GOLD 1.57%
XAU 5.51%
GDXJ 6.85%
TGLDX 5.68%

One week does not ensure that a trend will continue but the gold stocks have long been under priced in relationship to gold bullion. Eventually, this pricing disparity will converge. Throughout 2011, gold stocks underperformed gold as can be seen by comparing the performance of gold to the XAU.


XAU VS GOLD - courtesy

The Tocqueville Gold Fund (TGLDX), run by legendary gold investor John Hathaway, has vastly outperformed the S&P, the XAU and gold bullion over the past decade with an average annual return of over 26%.  This is what John Hathaway had to say about the long term performance of gold stocks in his first half investment update for the Gold Fund.

During the 1st half of 2011, gold shares lagged the gold price. Bullion rose 5.56% while the XAU benchmark declined 10.57%. The Tocqueville Gold Fund declined 5.53%. This apparent disconnect is not unprecedented. For example, during the credit crisis of 2008, the XAU declined 28.54% while the price of gold rose 5.77%. Even though the gold price is the single most important fundamental determining value for gold mining shares, they often do not move in lockstep and the first half of 2011 is one such example. In 2010, gold shares performed particularly well and the XAU rose 34.67% while the metal rose 29.52%. In our opinion, the relative underperformance of gold shares during the first six months of this year represented a healthy and necessary consolidation. The Tocqueville Gold Fund owns physical bullion but is much more heavily weighted to gold mining stocks, as has been the case over the past ten years.
We believe that there is significant performance catch up potential ahead for gold mining shares relative to bullion. Earnings reports for the quarter just completed should be exceptionally strong for all producers and in most cases surpass all- time records. We expect such results to be accompanied by numerous announcements of dividend hikes. Should gold prices maintain or exceed the $1500 level, skeptical investors will become more willing to normalize the earnings power that is soon to be demonstrated.
The factors that drive liquid assets into gold bullion continue to flourish. Most important, negative real interest rates open the floodgates for capital to seek out the safety of gold. In addition, the never ending sagas of the Eurozone debt woes and the US debt ceiling remind investors that sovereign debt of nearly all Western democracies are not the safe havens they were once regarded. Nevertheless, while we expect bullion prices to set new highs during the second half, we believe gold mining shares will provide returns superior to the metal.

The latest report on the top ten holdings of the Tocqueville Gold Fund are shown below.



Value Investor Loads Up On Gold Bullion

Panicky investors may be dumping their gold, but one investor with a superb long term track record of value investing is loading up on gold bullion.

In a Fortune interview, Charles de Vaulx, who runs the IVA Worldwide Fund, explains why his $10 billion fund holds over 7% in gold bullion.

At the time of the interview, gold was selling at $1,900 per ounce and de Vaulx was bullish based on a “mistrust of policymakers, be they in the U.S., Europe, Japan, or even China.”  The inability of politicians to arrive at agreements in the face of a looming debt crisis gives gold an inherent value that paper currencies do not possess.  As to why he would still be buying gold after a sevenfold rise since 2001, de Vaulx said that “the paradox with gold is that even though the price has gone up so much, it is still under-owned.” (See Americans Remain Underinvested In Gold.)  The IVA Fund has invested only in gold bullion which is viewed as being “safer and cheaper” than gold mining stocks.

Regarding the U.S. dollar, de Vaulx thinks that over the long term, the U.S. will be forced to solve its massive debt problems through currency debasement and inflation.   Initially, the bursting of a credit bubble causes deflationary problems but ultimately the policies of the Federal Reserve will produce inflation.  Fed policies will accordingly result in poor returns for bond investors who have sought shelter in U.S. treasury securities.

The circumstances under which de Vaulx would reduce his gold positions would be if policy makers are able to institute policies that would encourage sound currencies or if the values of equities become “truly cheap.”

According to Fortune, de Vaulx launched his fund only three years ago.   Based on a long term track record of superior investment returns, de Vaulx was able to quickly attract $10 billion in assets.  Due to the recent panic sell off in the gold market, de Vaulx’s fund has taken a hit, but my bet is that de Vaulx is taking advantage of the situation by scooping up more gold at bargain prices.