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.

Statistically Speaking Gold Should Have Been Strong In November – What’s Next?

gold1November has traditionally been a kind month for gold investors.  Since 2004 the price of gold during November (as measured by using the SPDR Gold Shares (GLD) as a proxy)  has been up 75% of the time with an average return of almost 5%.

As shown in a chart by @RyanDetrick, statistically speaking, the price of gold should have been up in November.

Instead of rising this November the GLD dropped from $126.95 to $120.70 for a price decline of 4.92%, the worst November for gold in 35 years.

GLD NOVEMBER

Conclusion?  Don’t rely on historical data to make current investment decisions.  Gold is in a downtrend and the selling is so overdone that the current market price of gold is below the production costs of most gold miners.

When will the price of gold recover?  No one can perfectly time price moves, but markets that are brutally oversold can come screaming back in a heartbeat when sentiment changes.  Long term gold investors only need to remember one important fact – the Federal Reserve is committed to a campaign that will continue to destroy the purchasing power of the dollar thus making gold a solid long term investment strategy for wealth preservation.

DOLLAR PURCHASING POWER

Why Gold Stocks Are Not a Substitute for Gold

gold & barAn investor who was correctly bullish on gold in late 2004 had three basic investment options to capitalize on an increase in the price of gold:

  1. Invest in physical gold
  2. Invest in a proxy for physical gold such as the SPDR Gold Shares (GLD)
  3. Invest in gold mining companies

The investor who picked option three does not have a lot to be cheerful about even after gold’s historic increase in value since 2004.  Why did gold stocks do so poorly in spite of a 500% increase in the price of gold bullion?  Merk Investment takes a look at gold versus gold stocks and explains why Gold Stocks Ain’t Gold.

A frequent mistake made by investors
is to invest in gold mining companies
(both juniors and majors) as a substitute
for gold. There are a couple of reasons
why this may be a mistake. Firstly, gold
mining company’s stock price does not
precisely track the price of gold. That’s
because lots of other factors influence the
share price of a company: management,
cost pressures, mining diversification,
stage of the mining process, to name just
a few.

This problem is generally more
acute for juniors than majors, because
juniors often have yet to “strike gold,”
therefore the stock price often trades more
like an option. Moreover, many mining
companies don’t only mine gold, many
also mine silver, palladium, diamonds
etc.

This dynamic also holds for baskets
of mining companies – baskets of miners
have significantly underperformed the
price of gold over recent years.  Some investors believe gold mining stocks may provide more attractive
investment exposure to gold than gold
itself. The investment thesis is as follows:
gold mining companies are able to take
advantage of an increase in the price
of gold through enhanced operational
leverage; as the gold price goes up, mining companies’ margins widen, ultimately increasing the bottom line.

However, this theory is predicated on fixed costs staying
relatively constant. Unfortunately, recent
performance does not support this
investment idea. Indeed, gold mining
stocks, on aggregate, have significantly
underperformed the price of gold.

The reality is that mining is a highly energy-
intensive undertaking, and therefore
many of the costs are closely linked to
energy prices, such as oil, which has also
experienced significant increases in price.
As a result, many mining companies
have not produced the anticipated
high level of profits. Additionally,
governments may demand higher taxes
and employees higher wages from mining
companies should profitability increase,
further limiting the upside potential for
shareholders.

The results for each investment option are shown below for physical gold, the GLD and the Vanguard Precious Metal and Mining Fund (VGPMX) used as a stock proxy.  Note that despite the horrible long term performance, a nimble investor in the VGPMX could have reaped  considerable gains by selling in early 2008 and then getting back into gold stocks after the crash of 2008.

PHYSICAL GOLD

PHYSICAL GOLD

SPDR GOLD SHARES TRUST (GLD)

GLD

VANGUARD PRECIOUS METALS FUND (VGPMX)

VGPMX

Gold Demand Drops By 13% In First Quarter Due to ETF Outflows

tenth oz gold-eaglesLarge scale liquidation of gold backed exchange-traded products (ETP) sent gold prices into a tailspin during April.  Billionaire investor George Soros, who had sold 55% of his holdings in the SPDR Gold Shares (GLD) during the last quarter of 2012, further reduced his gold positions during the first quarter.  Soros is a legendary trader and investor who has made billions moving ahead of the crowd.

In an interview published by the South China Morning Post on April 8, Soros said that gold was no longer a safe haven after the metal failed to rally last year despite fears of a euro collapse.  Shortly after Soros made his comments, other investors  began to sell and within days gold had tumbled by $200 per ounce.  Northern Trust Corp and BlackRock Inc also made large cuts in their holdings of ETPs, while John Paulson lost about $165 million by maintaining his stake in the GLD.

According to Bloomberg, assets held by ETPs declined in value by $42 billion as gold prices tumbled.

Global ETP holdings have tumbled 16 percent in 2013 after rising every year since the first product was listed in 2003, according to data compiled by Bloomberg. Assets in SPDR have plunged 22 percent, and they will probably drop by an additional 2 million to 4 million ounces after slumping 9.7 million ounces since mid-December, Deutsche Bank AG said in a report on May 14.

Further Drop

While the selloff has been faster than expected, a further drop in ETP holdings will probably mean more price declines, Goldman Sachs Group Inc. analysts including Jeffrey Currie wrote in a report dated May 14.

Northern Trust cut its SPDR stake by 57 percent to 6.9 million shares, according to a filing dated May 1. The asset-management company, as a custodian, holds assets without discretion over how they are invested, Doug Holt, the head of global corporate communications, said yesterday in an e-mail.

“We made one change to our global tactical asset allocation policy this month: eliminating our tactical position in gold,” Jim McDonald, chief investment strategist in Chicago at Northern Trust, which oversees about $810 billion, said in a report on March 13.

BlackRock, the world’s biggest money manager, trimmed its holdings by half to 4.1 million shares, a filing dated April 12 showed. On May 9, Robert Kapito, president of the New York-based company, said that he would still buy the metal.

The large scale liquidation of gold exchange traded funds was confirmed today in the latest quarterly demand and supply statistics published by the World Gold Council.  Overall gold demand for the first quarter declined by a considerable 13% with outflows from gold ETFs accounting for the bulk of the decline.  During the first quarter there were outflows of 177 tonnes from global gold ETF holdings.

The sale by large speculators of the gold ETPs seem to be the trigger that set off last month’s decline in gold prices.  The drop in gold could turn out to be a temporary factor as other buyers eagerly absorb supply by adding to their gold holdings at lower prices.

Aside from the sale of gold by holders of exchange traded products, demand for gold in the first quarter remained robust.  The World Gold Council noted that almost every other category of gold demand increased even as supplies are being constrained by lower mine output.

  • Mine production of 1,052 tonnes during the first quarter showed no growth and supply from scrap gold declined due to the drop in gold prices.
  • Jewelry demand surpassed the previous quarter and hit a new record with sales of $28.9 billion.
  • Demand from India and China, who collectively consume 62% of global gold jewelry sales, increased by 15% and 19% respectively.
  • Physical bar and coin demand during the first quarter increased by 8% and 18% respectively.  Demand for gold bar and coins in China exploded to 110 tonnes, double the average of the last five year quarterly sales.
  • Central banks added 109 tonnes of gold to their reserves in the first quarter, accounting for 11% of total gold demand.  Central banks have increased their purchases of gold for nine consecutive quarters.

Wholesale liquidation of gold positions by very large and wealthy speculators adversely impacted gold prices this year.  As gold demand from virtually every other sector continues to grow, the increased gold outflows from ETFs will eventually be absorbed.  In addition, as central banks continue to print money on an unprecedented scale, it would not be surprising to see large investors once again pour money into the gold ETFs.

Gold and Silver Bearish Sentiment Is At Extreme Levels

By:  John Townsend at The TSI Trader.

The usefulness of sentiment’s stealth crystal ball is about to be revealed to the litany of unsuspecting precious metal bears and skeptics who have convinced themselves that gold’s bull market is either over or, at the minimum, in need of lengthy ongoing retesting, restructuring and consolidation.

This article will bring us up to date as to the degree of current bearish sentiment regarding both gold and silver using no fewer than 5 sentiment indicators (with 9 illustrative charts), as well as provide the reader with an opportunity to observe the price outcome of previous bearish extremes using these sentiment indicators.

But first, let’s briefly consider the concept of investor sentiment.

Sentiment extremes, simply put, tell us that there are too many traders at one end of the boat and therefore the boat is about to tip over. Sentiment can strongly suggest that the trade, as some say, has become “crowded”. When someone finally yells “fire” in the “crowded” room there are so many of the market’s participants motivated to get out the same door and in the same direction that most get trampled – unable to reverse their trade fast enough.

Another way of characterizing a sentiment extreme is to say that the trade simply runs out of buyers or sellers, as the case may be. The extreme price momentum in one direction “exhausts” itself of all available ammunition to continue the trend and is sometimes signaled when someone yells “fire” in the “crowded” room, but often comes to a conclusion unrecognized by most traders as price reverses direction in an unassuming manner.

You may have heard comments when a particular market bottoms and then begins to trade higher and then continues to trade even higher yet, despite “bad” news, the assertion that the bullish price movement seems to make no sense – that it cannot possibly be sustained. At this time it appears to nearly everyone the common sense question to ask is how “bad” news that used to cause a market to go into free fall now seems to have absolutely no negative effect? And to observe that as this market continues higher, it always leaves behind those traders stuck in pessimism to declare that the market is “climbing a wall of worry”. That is, the “bad” news continues in the media, yet this particular market’s price reversal continues upwards.

We will begin with the put / call volume ratio of the options trade of the Silver Trust ETF (SLV) and the SPDR Gold Trust (GLD). Charts courtesy of Schaeffer’s Investment Research.

Click on image to enlarge.

The red line in the charts are the ETF’s price movement over the recent 2 years (GLD above, SLV below). The blue line is the put / call volume ratio. This considers the trading day’s volume of puts traded and is divided by the volume of calls traded. Generally, the higher the put / call ratio, the more bearish traders are about the ETF’s likely price movement, while the lower the put / call ratio, the more traders believe the ETF is bullish and going to rally higher.

Click on image to enlarge.

Undoubtedly you have noticed that both charts reveal that the put / call ratio is at the highs of the past two years; meanwhile price is at the lows of the past two years. I will leave it to you to observe the repetitively flip flop relationship between this sentiment indicator and price movement. For me, anyway, this indicator leaves little doubt as to the upcoming direction of GLD and SLV.

Next up is the Hulbert Gold Sentiment Index. This chart courtesy of Mark Hulbert’s Newsletters.

Click on image to enlarge.

This first Hulbert Gold Sentiment Index chart shows us that gold sentiment at present is even more depressed than at gold’s infamous 2008 low.

So there you have it. Sentiment on GLD and SLV options is crazy extreme, Hulbert’s Gold Sentiment Index reveals sentiment is not only more bearish than the 2008 bottom – it’s more bearish than anytime in the past 17 years (at least).

Read complete article here.

Will John Paulson Dump His Gold Holdings?

John Paulson, famed for making billions ahead of the financial crash, is taking heavy losses on his gold holdings. According to Bloomberg, Paulson’s gold fund is down 28% as of March 31st.

As of the latest reporting period, Paulson hedge funds hold 21.8 million shares in the SPDR Gold Shares ETF (GLD), worth a massive $3.1 billion as of Friday’s closing price of $143.95. Whether or not Paulson decides to cut his losses or double down could have a major impact on the future price of gold.

 

Explosive Gold Rally Is Imminent Based On Bearish Sentiment and Fundamentals

You know the world is changing when the head of the world’s biggest bond fund recommends gold as his first asset choice.

In this week’s Barron’s Roundtable, Bond King Bill Gross affirms his bullish view on gold due to his assessment that central banks will continue to suppress interest rates by purchasing vast amounts of government debt with printed money.  Gross notes that the financial system is now longer operating under free-market capitalism when the Fed is buying a “remarkable” 80% of debt issued by the U.S. Treasury.  Massive deficits are being funded with printed currency on a global scale never attempted in the past and sooner or later, according to Bill Gross, inflation will blow past the central bank’s targeted rate of 2.5%.

The really big risk comes when huge holders of U.S. debt such as China and Japan become disgusted with U.S. fiscal and monetary policies and decide to dump their treasuries as inflation decimates the value of their holdings.  Bill Gross tells Barron’s exactly what could go wrong and which gold investment he likes the best.

The big risk is that the Chinese would rather own something else. Investors can choose between artificially priced financial assets or real assets like oil and gold or, to be really safe, cash. The real risk to the financial markets is the marginal proclivity of investors to put their money in real assets, or under the mattress. Thus, my first recommendation is GLD — the SPDR Gold Trust exchange-traded fund. It has a fee, but it is an easy way for investors to buy a real asset.

Lots of things go into pricing gold, but real interest rates [adjusted for inflation] and expected inflation are two dominant considerations. Gold probably won’t move much from current levels unless real rates decline more or inflationary expectations rise from the current 2.5% to 3%, or higher. That’s what gets gold off the dime. It is a decent hedge. It doesn’t earn anything, but not much else earns anything either.

Pounding the table even harder than Gross, Fred Hickey, editor of the High-Tech Strategist, tells Barron’s that an explosive rally in gold seems imminent based on the massive bearish sentiment towards gold.  Long term, Hickey sees gold hitting at least $5,000 per ounce, a target that Gold and Silver Blog also sees as a very reasonable future price target.

Hickey: I am recommending gold, as I have done for many years. I will continue to do so until the gold price hits the blow-off stage, which is nowhere in sight. I am excited about gold because sentiment is so negative. Gold could have a sharp rally at any time. The Hulbert Gold Newsletter Sentiment Index went deeply negative last week, indicating that gold-newsletter writers are recommending net short positions. When that happens, gold almost always rallies. The daily sentiment index for gold is at a 12-year low. Short positions by large speculators have doubled in the past few months. Sales of American Eagle coins hit a five-year low in 2012. Yet, the environment for gold couldn’t be better. We talked today about massive money-printing by all the major central banks. Real interest rates are negative. These are the best possible conditions for a gold rally.

Felix said gold could rally to the $1,800-an-ounce level, and I agree. If it breaks that, it will go to $2,000 or more. As long as we have unlimited quantitative easing, we have the potential for unlimited gains in the gold price. Gold could go to $5,000 or even $10,000. You can buy gold through the GLD or IAU, as we discussed. This year I recommend physical gold. You can buy American Eagle coins, or gold bars. Everyone should have some physical gold, and almost no one in the U.S. does.

Hickey also says that the price of gold is nowhere near a “blow off stage”, despite constant mainstream press reports of gold’s imminent collapse.  For further discussion on this see The Gold Bubble Myth and Why There Is No Upside Limit For Gold and Silver Prices.

Gold As An Investment Will Continue To Shine

Despite the non stop rally in the price of gold for over a decade, every normal pullback has been proclaimed as “the end of the gold bull market” by the mainstream media.  Will gold eventually become an over-owned and overpriced asset?  Yes – but that day will not arrive until gold is many thousands of dollars higher.   Long term gold investors who have stayed with the primary trend have already outperformed every other asset class over the past decade as shown in this neat infographic from the Visual Capitalist.

visualcapitalist.com

There Is “A Limited Amount of Gold, An Unlimited Amount of Paper Money”

Legendary bond king investor Bill Gross, who presides over the world’s largest bond funds makes a compelling case for owning gold in an interview with Bloomberg TV.  Lead manager of influential Pacific Investment Management Company (PIMCO) since 1987, Bill Gross reputedly made $200 million in 2011.

The PIMCO Total Return fund has produced a fat 9.5% return for investors over the past five years, trouncing the returns on the S&P 500 and the vast majority of competing bond funds.  Total funds managed by PIMCO total a staggering $1.8 trillion.

PIMCO’s success has in large part been due to Bill Gross’s ability to accurately assess the macroeconomic picture.  Bill Gross’s bullish position on gold is not something to be lightly discounted by investors.

According to Bill Gross, the bullish outlook for gold rests on the endless expansion of credit by central banks.  Gold has a considerable store of value that paper money does not and there is a “limited amount of gold, an unlimited amount of paper money.”

When world central banks engage in a long term period of money printing and start writing checks in the trillions, it is best to have something that’s tangible and can’t be reproduced like gold. Gross expects that central banks, which have trillions of dollars in reserves, will continue to expand their holdings of gold rather than invest in 10 year government bonds that pay a paltry 1% interest.

Buy The SPDR Gold Trust – You Don’t Argue With Paulson and Soros

Despite the correction in gold prices since last summer, investors in gold ETFs have increased their stakes.  Worldwide holdings of gold ETFs are now at a record 2,417 metric tons according to Bloomberg News.

The SPDR Gold Trust (GLD) is the largest gold ETF and has returned a lustrous annual return of 18.4% since the fund’s inception on November 18, 2004.  The GLD currently holds 1,258.15 tonnes (40.45 million ounces) of gold in trust valued at $64.8 billion.  The all time record high holdings of the SPDR Gold Trust was 1,320.47 tonnes on June 29, 2010.

The slight decline from record gold holdings of the GLD do not represent a lessening of gold demand by investors.  Numerous competing gold trusts such as the iShares Gold Trust (IAU) which holds $9.3 billion of gold bullion have simply given investors a wider choice of options and expanded the overall market for gold ETFs.

Word that two of the world’s most successful investors have increased their stakes in the SPDR Gold Trust highlight the fact that the bull market in gold is far from over.   Billionaires John Paulson and George Soros, both long time investors in the GLD , both recently increased their holdings.

Courtesy yahoo finance

While Paulson has increased his massive stake in the GLD over time, Soros attempted to time the market.  In the first quarter of 2011, Soros sold 4.7 million shares of the GLD which brought his holdings down to a token 49,400 shares.  Subsequent to his sale, gold soared about $500 per ounce higher to $1,900 during August 2011.  Short term trading is difficult for anyone, including one of the world’s most successful investors.  Since the fundamental reasons for owning gold have only become more compelling, small investors would be best advised to hold long term instead of trying to trade a temporary price pullback.

Courtesy kitco.com

According to Bloomberg, Paulson and Soros Add Gold As Price Declines Most Since 2008.

Billionaire investors George Soros and John Paulson increased their stakes in the biggest exchange- traded fund backed by gold as prices posted the largest quarterly drop since 2008.

Soros Fund Management more than doubled its investment in the SPDR Gold Trust to 884,400 shares as of June 30, compared with three months earlier, a U.S. Securities and Exchange Commission filing for second-quarter holdings showed yesterday. Paulson & Co. increased its holdings by 26 percent to 21.8 million shares.

Paulson, 56, who became a billionaire in 2007 by betting against the U.S. subprime mortgage market, lost 23 percent in his Gold Fund through July as lower bullion prices and slumping mining stocks contributed to declines.

Still, prices have rallied for 11 consecutive years, gaining more than sevenfold, as investors snapped up the metal after government and central bank stimulus programs boosted speculation that inflation would accelerate. The metal is up 2.4 percent this year.

“People expect prices to rise in the third quarter since historically it has been proved that it’s one of the best periods for gold, and investors who see easing coming in from various central banks are either increasing or holding on to their positions,” Donald Selkin, the New York-based chief market strategist at National Securities Corp., which manages about $3 billion of assets, said by telephone.

Paulson’s increased stake in the GLD should come as no surprise.  In a previous post during July, it was noted that Paulson remained steadfastly bullish on gold with a $4,000 target.