October 2, 2022

What is the Best Way to Invest in Gold?

Major Gold Mining Stock Outperforms Bullion and Gold ETFs

Investors in gold often wonder about the best way to own the precious metal.  Gold is gold but depending on the vehicle used to purchase gold, investment returns can vary dramatically.

Simply put, the three basic ways to invest in gold are gold bullion, gold bullion ETFs, and gold mining stocks.

Gold Bullion

Purchasers of gold bullion may not trust “paper gold” or they may simply appreciate the beauty of gold bars and coins.  There is an innate satisfaction in being able to physically admire and touch gold, a metal that has had value to man since before the dawn of civilization.  Paper currencies always eventually wind up worthless while gold will maintain purchasing power.  The pleasure of owning physical gold does have drawbacks, the biggest of which is security and storage.

Although gold has moved up dramatically since 2019, the current price of around $1,950 is still slightly below the record high of $2,061 reached in August 2020.

gold Technical chart [Kitco Inc.]

Gold Bullion ETFs

An easy and low-cost method for purchasing gold bullion is by investing in gold bullion ETFs.  Funds put into gold ETFs are invested in physical gold and the fund is responsible for physical security.  The largest gold ETF is the SPDR Gold Shares (GLD) which currently holds about $68 billion in assets.  The ETF has a relatively low expense ratio of 0.40%.  The GLD will closely match the move in the price of gold bullion less the expenses of running the fund.

The GLD currently trades at $181.47 slightly below its high of $190.81 reached in August 2020.

Another ETF worthy of consideration is the iShares Gold Trust (IAU) which currently trades at $36.97, holds $32 billion in physical gold and has an expense ratio of only 0.25%.

Gold Mining Stocks

Gold mining stocks are where it all starts.  Someone must undertake the expensive process of locating and mining gold ore to produce refined gold.  The profit generated by the gold mining stocks depends not only on the price of gold but also on how efficiently gold mining companies are at exploration and deploying capital.  Many junior gold mining companies have not been able to participate in price gains despite the increase in gold prices.

There are two ways to invest in gold mining companies.  An investor can invest in a basket of gold mining stocks in a mutual fund or ETF such as VanEck Gold Miners ETF (GDX) or by purchasing individual gold mining companies.  Purchasing an ETF allows an investor to spread risk across the industry.  Purchasing a successful gold mining company can result in gains that far exceed the increase in gold bullion.

For example, the GDX currently trades at $39.67, below the price reached in August 2020.

Now, look at the performance of Newmont Corporation (NEM) a major gold mining company which has recently exploded to an all-time high and up 173% since late 2019.

There is no way to know which way of investing will work out best until after it happens.  Always diversify to reduce risk is probable the best advice.

Selling Climax in Gold and Silver Stocks Is a Classic Buy Signal

chartThe bear case for gold and silver stocks is well known and investors have reacted by dumping mining stocks indiscriminately.  The staggering decline in gold and silver stocks over the past two years now exceeds the decline that occurred during the crash of 2008 when the financial system was at the brink of collapse.

The Philadelphia Gold and Silver Index (XAU) is an index comprised of sixteen major precious metal mining companies. During the crash of 2008 the XAU declined by 58.5%.  From the peak of 226.58 in December 2010 to the low of 90.15 in June 2013, the XAU has collapsed by 60.2%.

Courtesy Yahoo Finance

Courtesy Yahoo Finance

Has the sell off of the past two years been so extreme as to constitute a selling climax which usually signals a major reversal from the lows?  According to John J. Murphy, an acknowledged technical analyst, a selling climax is “usually a dramatic turnaround at the bottom of a down move where all the discouraged longs have finally been forced out of the market on heavy volume.  The subsequent absence of selling pressure creates a vacuum over the market, which prices quickly rally to fill.”

It is too early to tell if prices have reached a capitulation bottom but investors who haven’t sold out positions in the precious metal miners after a 60% decline are probably thinking more about buying than selling.  Another factor that impedes future selling is the fact that investors are now getting paid to wait for a turnaround in the mining industry.

Historically, precious metal miners have never paid out large dividends but this metric has changed.  The stock price declines in  senior gold and silver producers have been so severe that the dividend yields on some gold mutual funds now approaches 4%.

The $2.4  billion Vanguard Precious Metals and Mining fund (VGPMX) currently yields 3.76% and holds a well diversified portfolio of seasoned mining companies.  The Vanguard fund holds investments in both domestic and foreign companies involved in activities related to gold, silver, platinum, diamonds, and rare minerals.

The chart on VGPMX looks like a reason for precious metal investors to commit suicide but if a selling climax has occurred, the losses of the past two years may be quickly recouped.  In addition, the chart of the Vanguard fund has made a triple bottom over the past six months.

VGPMX

Courtesy: Yahoo Finance

Another classic sign of a bottom in precious metal stocks was discussed by Mebane Faber who has drawn an analogy to the bottom of stock prices in early 2009 to the current chart of the Market Vectors Gold Miners (GDX).  In 2009 the S&P 500 kept hitting new lows even as the RSI and the MACD were making higher lows which is a classic bull signal.  A similar situation exists today with the GDX.

Courtesy: mebanefaber.com

Courtesy: mebanefaber.com

 

 

Gold Stocks Remain Frozen In Time

Investors in gold mining stocks have had a tough five years.  Since 2008, the price of most gold stocks have remained frozen in time even as gold bullion has doubled in price.  Is the disparity in price performance between gold stocks and gold bullion a bullish set up or another false dawn for gold stock investors?

Gold - courtesy kitco.com

The PHLX Gold and Silver Index (XAU), which is comprised of 16 major gold and silver producers, is no higher than it was during the last quarter of 2007.   The large cap gold stocks represented by the Market Vectors Gold Miners ETF (GDX) have shared the same fate with no gain for the past five years.

GDX - courtesy yahoo.com

Beginning in 2011, the divergence between the price of gold bullion and gold stocks has widened even further.  Comparing the SPDR Gold Trust (GLD) to the PHLX Gold and Silver Index, we see that gold has dramatically outperformed gold stocks by a factor of five since early 2007.

XAU vs GLD - courtesy bigcharts.com

At this point, gold stocks are incredibly oversold and, in addition, represent sound fundamental value based on the price of gold bullion.  Given the notorious volatility of gold stocks, a move by gold above its high of last year could be the spark that ignites a huge rally in the gold stocks.

John Hathaway of the Tocqueville Gold Fund (TGLDX), who has produced fabulous investment returns over the past decade, had this to say in his latest 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.

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.

Over the past ten years the Tocqueville Gold Fund has had an average annual return of 24%, far exceeding the 3% return by the S&P500.   The top ten holdings and percent of total assets of the Tocqueville Fund are listed below.

TGLDX Holdings

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 yahoo.com

Gold price - courtesy kitco.com

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.

AUY OUTPERFORMS - courtesy yahoo.com

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.

AUY - COURTESY YAHOO.COM

Gold Mining Stocks Break Out To New Highs; 3 Gold Stocks That Should Double

The divergence between the performance of gold bullion and gold stocks seems to be coming to an end.  Both the Market Vectors Gold Miners ETF (GDX) and the Gold Bugs Index ($HUI) have broken out to new highs as investors move into undervalued gold mining shares.

 

During the initial stages of the gold bull market,gold stocks significantly outperformed gold bullion.  From October of 2000 to June of 2008 gold stocks, as measured by the PHLX Gold/Silver Index (XAU), rose 345% compared to a gain of 252% for gold bullion.

Since 2008 gold stocks have significantly underperformed bullion as gold prices increased by over $1,000 per ounce.    As a result, many gold stocks are selling at bargain prices based on increased earnings and the value of proven gold reserves.

Investors have a wide variety of options for investing in gold mining shares including ETFs and gold stock mutual funds.  One of the best performing gold funds is the Tocqueville Gold Fund (TGLDX) run by John Hathaway.  TGLDX has achieved an average annual return of 26% over the past 10 years.   An investment of $10,000 in the Tocqueville Gold Fund made in June 2001 was worth $102,929 as of June 2011.

For investors who prefer to invest in individual gold mining shares, here’s a short list of three gold mining stocks that could easily double in price.

Newmont Mining (NEM) is a large cap gold mining company with proven and probable gold reserves of 93.5 million ounces.  NEM has a strong balance sheet, is forecasting an increase in gold production of 35% over the next six years and pays a cash dividend of 50 cents per share (see A Large Cap Gold Stock That Could Double in Price). NEM hit a new all time high today.

Kinross Gold (KGC) is selling at a large discount to the value of its gold reserves.  One value investor is forecasting a price target of $27 per share (see How Patient Investors Can Buy Gold At $250 Per Ounce).  KGC closed Thursday at $18.18, up $0.40.

Richmont Mines (RIC) is a junior gold producer.  Earnings for the second quarter of 2011 increased from $0.01 per share to $0.16 per share compared to the prior year.  RIC hit a new high of $12.03 at yesterday’s close.

 

 

 

 

 

Is The Plunge In Gold Stocks Predicting A Drop In Gold?

American Gold Buffalo

Gold stocks have been under performing gold bullion for the past three years.

The poor performance of gold stocks is reflected in the sub par returns of gold mutual funds run by two of the countries largest investment companies.  The three year return on Vanguard’s Precious Metals Fund (VGPMX) has actually had a negative return over the past three years as the price of gold has soared by 80%.  The Fidelity Select Gold Portfolio (FSAGX) has returned only 16.2% over the past three years. (See Physical Gold Outperforms Vanguard and Fidelity Gold Mutual Funds).

Senior gold producers such as Newmont and Kinross Gold are increasing gold production and solidly positioned for significant earnings increases but their stock prices have not been able to match the returns of gold bullion.

Although there are many reasons to expect that gold stocks will catch up to gold and deliver large gains to investors, so far this has not been the case.

Adding fuel to the investor debate over the relative merits of gold stocks versus gold bullion has been the drastic price divergence exhibited since the beginning of 2011.  While gold has held virtually all of its gains, the price of many gold stocks has plunged.  An investor in gold stocks not tracking the price of gold would probably conclude that the price of gold had collapsed during 2011.

Since January 1st, the price of gold has gained $116 per ounce or 8.3%.  From January lst to recent June lows, the price of Newmont Mining is down  by $9.27 (15.2%), Kinross Gold is down by $3.96 (20.8%) and Agnico-Eagle Mines is down by $16.01 (20.9%).  A broad basket of gold stocks, as measured by the Gold Miners ETF (GDX) has declined by $9.69 or 15.8%.

Adding to concerns about the recent sell off in gold stocks is the especially wide price divergence seen since May lst.  Although many individual gold stocks have long lagged the returns of gold, the GDX, a broad based index of gold stocks has generally tracked the price movement of gold over the past several years.  Since the beginning of May, however, the linkage between gold stocks and gold completely broke down, leaving investors to ponder the significance of such a wide divergence.

 

STOCKS VS GOLD - COURTESY YAHOO.COM

 

 

On past occasions, weakness in the gold mining shares has been a harbinger of a sell off in the gold market.  Is the current weakness in gold stocks currently forecasting a decline in the price of gold?  The end of the Fed’s money printing campaign, the world wide debt crisis, concerns about deflation, a weakening economy and the decline in commodity prices lead some to believe that a liquidity driven crisis could result in lower gold prices.

Despite short term concerns over the price of gold, the reasons for remaining long term bullish on gold are numerous.  The fundamental problems of excessive debt, debased currencies, widespread insolvency among sovereign states and out of control spending by the U.S. government all suggest that we remain on the precipice of another economic crisis.  Governments and central banks have no solutions except for the printing presses, which will be turned up to full speed at the inception of the next financial crisis.

At the margin selling may temporarily drive down gold prices in the short term, despite the solid long term bullish fundamentals for gold.  The long term trend for gold remains higher and any temporary price weakness would be a buying opportunity for gold investors.