July 6, 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.

Gold Resource Asks Why Short Positions Soared Prior To Negative Barron’s Article

The latest edition of Barron’s published an extremely negative article on Gold Resource Corp.  Barron’s raised questions about the gold miner’s reserves, stock sales by company insiders, mine production delays, gold production below targeted results and the use of stock dividends to “promote” Gold Resource’s stock price.

In response to the Barron’s article, Gold Resource issued a press release disputing all of the Barron’s allegations.  In addition, Gold Resource also raised serious questions about the massive increase in short positions prior to the publication of the negative Barron’s article.

By way of background, Mr. Santoli contacted the Company on May 18, 2011 which was just after the short interest in the Company’s common stock jumped by 1,585,906 shares to its largest short position of 2,235,554, an increase of 41%, according to the Amex May 2011 short interest report. As Mr. Santoli pointed out in his article, the short position has continued to increase substantially since that time to approximately 3.4 million shares, according to the latest NYSE report.  However, one thing Mr. Santoli failed to mention in his article is that he was in direct contact with investors holding short positions during the time he was preparing his article.  While we can only speculate about his motivations while creating this article and the reason why the short position increased significantly during this time period, we are going to focus our energy on correcting a few of Mr. Santoli’s incorrect factual assertions.

As  previously discussed, one week prior to the publication of the Barron’s article, the trading volume in Gold Resource exploded to  7.7 times the daily average volume with the stock down about 5%.  The massive increase in short positions prior to the publication of Barron’s article appears to be more than a coincidence.  Short sellers appeared to know in advance that a negative article on Gold Resource was due to be published and dramatically increased short positions.

The shorts profited handsomely as the stock plunged in the first day of trading after the Barron’s article was published.  After trading as low as $20.55, GORO closed at $22.63, down $1.47.  Shareholders of Gold Resource certainly deserve more information on the circumstances relating to the massive short position in Gold Resource stock and hopefully the Company will pursue this matter further.

The Gold Resource press release disagrees with every negative point in the Barron’s article and defends the Company’s approach in not using an SEC compliant reserve report.

Gold Resource effectively reputes the Barron’s charge that management “have been consistent sellers of the stock”.  The amount of stock sales by management amounted to only $13.7 million in the past year which is immaterial in relationship to total stock holdings by management, who remain the largest shareholders of Gold Resource.

One issue not resolved by either Barron’s article or the Gold Resources press release is a definitive answer on the amount of gold reserves in the El Aguila mine.  Since Gold Resource never conducted a study to assess the “proven and probable reserves” of El Aguila, this question will ultimately be resolved as mine production progresses.  Indications that mine production is increasing was provided by another Gold Resource press release on July 5th, in which the Company disclosed record production, revenue and earnings for the second quarter.

If Gold Resource continues to put up records results, the stock price of GORO could soar as nervous short sellers scramble to cover short positions.

 

GORO - COURTESY YAHOO FINANCE

 

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.