Gold for Defense. Gold Stocks for...?

By: Adrian Ash | Fri, Jun 4, 2010
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Gold stocks stopped beating gold in 2005. They've lagged it since 2007...

IF GOLD'S GOING UP, then gold-miner stocks will rise further and faster. Right?

Gold Isn't Gold Miners

"Gold mining stocks [are] a more risky but more profitable way to invest in gold," says Alix Steel at in New York.

"Gold bullion is defense. On the offensive side," agrees Charles Oliver of Sprott Asset Management in Toronto, "if you want capital gains, [you want] gold stocks.

"We're in a bull market in gold and, generally speaking, most of the time gold stocks will outperform bullion."

Thing is, that period of time - "most", as Oliver says - sits oddly inside the last 10 years of rising gold prices. TV football pundits would call it a game of two halves (football being a game of foot and ball, of course, rather than helmets, armor and cheerleaders).

Because over the first half of the bull market to date, gold stocks far outperformed the metal. Over the second half, in contrast, gold has matched and then beaten both the leading gold-equity funds and stocks, on average - and with significantly lower volatility, too.

  10 year
% gain*
5 year 3 year 1 year 2010-
Latest 1-
month vol.**
Gold $/oz 347 190 85 28 10 0.17 0.18
XAU 201 105 26 13 1 0.39 0.34
HUI 629 150 39 19 4 0.42 0.37
USERX 707 235 47 21 3 0.35 0.36
USAGX 1053 281 64 32 6 0.33 0.34
TGLDX 825 206 47 50 10 0.30 0.31
INIVX 794 272 60 37 8 0.36 0.33
MRCGLDA 882 251 77 29 12 0.28 0.32
Gold £/oz 357 267 155 42 23 0.16 0.25
* Data to end-May 2010
** Daily volatility, rolling 1-month. Lower is better for sleeping at night.

XAU Philadelphia Gold & Silver stock index
HUI Amex Gold Bugs stock index
USERX U.S. Global Investors Gold and Precious Metals Fund
USAGX USAA Precious Metals and Minerals Fund
TGLDX Tocqueville Gold Fund
INIVX Van Eck International Investors Gold Fund
MRCGLDA LN Equity  Blackrock Gold & General (£)

Take from this what you will, but between 2000 and 2005, gold priced in Dollars rose 55%. The HUI index of 16 leading US-listed mining stocks added 195% (excluding dividends). Tocqueville Asset Management's Gold Fund rose 190% by value.

From 2005 to end-May 2010, however, gold rose 183%, while the Tocqueville fund rose 177% and the HUI index of producer stocks rose 116%.

Sure, there were better-performing gold stocks (Randgold's Nasdaq listing, GOLD, has more than quintupled in price since Jan.'05). There were better-performing funds over the last five years too, including the USAA Precious Metals and Minerals Fund (USAGX) and Van Eck International's Investors Gold Fund (INIVX).

But the apparent "leverage" to gold for which producers and actively-managed funds are recommended has evaporated over the second half of gold's 21st century bull run so far. More telling still, it's actually worked against gold equities and funds amid the financial crisis' greatest points of stress.

Gold versus Miners and Funds

"When you buy or track the underlying metal - rather than investing in producer stocks - you don't get management risk, political risk, corporate tax, permitting risks and so on," said ETFSecurities' Scott Thompson this week.

You could say he was talking his book. (So are we here at BullionVault, naturally.) But what you do get when you buy gold - and what isn't offered by mining stocks or actively-managed mining-stock funds - is just a lump of metal, used to defend and store value, almost universally, for perhaps 7,000 years or more. That rare, shiny lump is as far as you can get from the growth-driven aims of most financial analysts and journalists today. Despite the worst recession and loss of global investment wealth since the 1930s, they'll still look for growth - and juiced-up profits - even from an unyielding lump of gold.

How much further might gold stocks and gold diverge from here? It might well depend on just how much deflation - capital destruction and "negative growth" - still lies ahead.



Adrian Ash

Author: Adrian Ash

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

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