July 5, 2022

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 yahoo.com

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 yahoo.com

 

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.

courtesy yahoo.com

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.

Will Gold Resource (GORO) Become A $5 Stock?

Gold Resource Corp (GORO)  has been one of the best performing gold stocks over the past five years, outperforming the appreciation in gold bullion by around 2,000%.  From a price of $1 per share in September 2006, Gold Resource rose to the $5 per share range by mid year 2007 and earlier this year hit an all time high of $31.38.  GORO closed at $24.10 on Friday and may head much lower in the aftermath of a devastating article published in this week’s Barron’s.

Highlights of the disclosures and questions raised about GORO in the Barron’s article include the following:

  1. The company is run by the Reid family and Bill Conrad, who helped the company in its initial public stock offering in 2006.  Barron’s discloses that the Reids and Conrad “have been consistent sellers of the stock” with $13.7 million of sales in the just the past year.
  2. Gold Resource’s primary mine in El Aguila, Mexico, has seen constant production delays despite promises since 2007 that production would soon increase.  In April of this year, according to Barron’s, the mine produced only 20,000 ounces  after being targeted for 70,000.  The expenditure of $95 million, raised in equity offerings, has produced minimal results in terms of gold production.
  3. The El Aguila mine was abandoned by Apex Silver Mines after they explored the site in the early 2000s.
  4. Gold Resource has never conducted a study to accurately assess the “proven and probable reserves” of the El Aguila mine.  According to Barron’s, investors only have the Reids’ word to rely on for estimates of gold deposits and the cost of extraction them.
  5. The two largest investors in Gold Resource are Hochschild Mining of Peru and the Tocqueville Gold Fund.  According to Barron’s, “the largest holders, who have known the company the longest, have not been buying stock at anywhere near the current price”.   Legendary gold investor John Hathaway of the Tocqueville Gold Fund told Barron’s that his geologist has visited the El Aguila mine twice and ore samples are “consistent with a potential deposit of two to three million ounces of gold equivalent”, worth up to $4.5 billion in gross revenue.  Almost 4% of the Tocqueville Gold Fund is invested in Gold Resources.
  6. Barron’s discloses that Gold Resource President Jason Reid sold $700,000 of stock “on May 19th, a day after Barron’s  first emailed him some questions”.
  7. Barron’s claims that Gold Resource management is “promoting the stock” with cash dividends despite the fact that “the company has never, in a single quarter, produced positive cash flow”.
  8. Barron’s concludes that investors shorting the stock “are probably wise” not to take management’s word on how much gold Gold Resource actually has or how much it will cost to mine.

The recent trading action in Gold Resource Corp stock raises some intriguing questions.  On June 24th, GORO traded down $1.47 as trading volume exploded to 3.3 million shares, the highest volume in the stock’s history and 7.7 times the stock’s daily average trading volume.  The massive surge in trading and lower stock price a mere week before the damning Barron’s article was published suggests that some investors knew in advance what was coming.  Investors also have a significant short interest position in GORO of almost 11% of the stock’s float.

 

GORO - COURTESY YAHOO FINANCE

If Barron’s doubts about Gold Resource prove correct, the stock may be looking at a return trip to $5 per share.

Insights From One Of The World’s Lengendary Gold Experts

The Standard & Poors 500 stock index is still below the level it reached more than 10 years ago in early 2000.  Interest rates on traditional bank savings have barely exceeded zero percent since the Fed instituted its zero interest rate policies in 2008.  Meanwhile, incomes are stagnant and the cost of items we use everyday have been inexorably increasing.

Investors who expected to achieve financial independence by investing in actively managed stock mutual funds have seen their dreams turn to nightmares.  The brutal truth is that the vast majority of mutual fund managers do not beat the market over the long run.   Investors who did not diversity out of traditional investments have seen the value of their savings diminished by inflation and stagnant stock prices.

By contrast, one legendary gold investor who has consistently made great calls in the precious metals markets has achieved average annual returns over the past ten years of over 29%.  Money doubles in about 2.5 years at 29%.  Investors who had the patience and conviction to ride out inevitable corrections have seen fabulous returns.

The man who achieved this stunningly successful investment record is Harvard educated John Hathaway, who has been with the Tocqueville Gold Fund (TGLDX) since its inception in 1998.  Hathaway’s success has been based on his ability to chose smaller mining companies that have the potential for explosive growth and then patiently wait for results.  The average gold mutual fund has an annual holdings turnover of 104% compared to 9% at TGLDX.  While other fund managers frenetically trade mining stocks, Hathaway’s deep knowledge of the companies he invests in has resulted in superior investment returns.  Also benefiting shareholders is the fact that the TGLDX does not charge  front end or deferred sales loads which reduce investor returns.

The TGLDX has soundly beaten the investment performance of both gold bullion and the widely followed PHLX Gold/Silver Sector (XAU) which holds a broad basket of gold and silver stocks.  Since 2000, the TGLDX has returned approximately 810% compared to 500% for gold bullion and 325% for the XAU.

TGLDX VS XAU - COURTESY YAHOO FINANCE

When John Hathaway speaks, serious gold and silver investors pay attention.  In the Tocqueville Gold First Quarter 2011 Observations, Mr. Hathaway explained why he remains positioned for further gains in the precious metals and related equities.

Mr. Hathaway noted that his current position on gold is based on interrelated macro economic issues which make the “current landscape especially tricky”.   Hathaway noted that “the Fed seems predisposed to maintain extremely lax monetary conditions” and that “a credible fiscal plan seems like a long shot”.   Conditions in the Middle East could worsen considerably, energy prices are likely to remain at levels that seemed “unthinkable” a year ago and if there is political resistance to the Fed reducing its balance sheet, “the conditions are ripe for an inflationary spiral”.

The dollar appears to be deeply oversold and a near term rally could slow gold’s uptrend, according to Hathaway.

Mr. Hathaway feels that by mid year, the outlook will be more clear but in the meantime, “we remain positioned for further advances in precious metals”.

The top 8 stock holdings of TGLDX at March 31, 2011 were Goldcorp (GG), Newmont Mining (NEM), IAMGold (IAG), Ivanhoe (IVN),  Silver Wheaton (SLW), Gold Resource Corp (GORO), Osisko Mining (OSK) and Randgold Resources (GOLD).