Tuesday, June 28, 2011

Gold: Go With Bullion, Not Miners

I was reading a couple of Seeking Alpha articles the other day, entitled "Are Gold Miners Set to Explode?" and "Echoes of 2008 Suggest Caution for Precious Metals Investors." This got me to thinking about the relative performance of gold and gold stocks, because before going to graduate school I interned for a summer as a runner on the Chicago Mercantile Exchange. There I was thrown into the world of trading and introduced to the numerous rules about trading.

Among well known: trade with the trend, cut losses, let profits run, etc ... rules, there was, always go long the strongest performing contract in a complex. Such as buying corn in the grain complex if it was up the most compared to soybeans and wheat.

You get on that horse and ride it until the trend is over!

One can transition this thinking into gold bullion vs. gold stocks since recently, gold bullion (gld) has outperformed gold stocks (gdx-majors gdxj-minors) since late April when the silver market peaked.


GLD - red  GDX - blue  GDXJ - green  from stockcharts.com
(Click to enlarge)

Obviously gold stock investors believe that the gold price has stagnated or peaked. Throw in correlation and tatical asset allocation trading and the movement in gold stocks, as represented by the indexes, are down -16% GDX and -21.5% GDXJ compared to -1.5% GLD from April 29 to June 20, 2011.

During this time I have been long gold stocks primarily through options, without leverage, so the beating was not as bad, but still hurt! (example of cutting losses).

Now if the bears are correct about the price of gold, then a roll over most likely would bring gold stocks down with it. However, if the gold bull market is intact, and just resting, then GLD has shown itself the strongest of the complex.

The thought that gold miners are "undervalued" based on a stable gold price is tempting. However, I keep two things in mind on the minus side of the pro/con list.

First, gold mines can be confiscated by unfriendly governments much easier than gold (I don't want to get into order 6102 discussion here). Second, one reason to own gold is to hedge against inflation, and with this in mind, inflation causes problems as shown in this article "Fear the Boom, Not the Bust."

"Avoid those industries that are most capital intensive, because in an inflationary environment government taxes phony profits. Much capital investment was expended years ago at lower replacement prices, but the tax man does not recognize replacement cost, only historical cost. So capital-intensive industries report higher profits due to low, historical depreciation expense. In effect, they are being taxed on their capital and cannot retain enough earnings to replace their worn-out plant and equipment. America's so-called Rust Belt of the '70s and '80s can be attributed to the inflation that was begun in the '60s. Now it is coming back."

Mining is very capital intensive.

I have come to the conclusion through reading, research and writing that going long gold bullion appears to be the best way to proceed with a position in the precious metal sector; if one still adheres to the hypothesis that a gold bull market is still underway. I will do some selective stock picking of gold mining stocks but buying the whole gold stock index for an investment seems inferior. I will most likely use gold call options and bull call spreads with options, just in case the gold bears are right. This does produce inferior results compared to outright longs but one is much less concerned about forced liquidation contagion, as happened in 2008 with gold and gold stocks; there is always enough dry powder left to take advantage of fire sale prices.

Disclosure: I am long RBY. Gold, gold stocks, gold stock options

VIEW SOURCE: SEEKING ALPHA

Sunday, June 26, 2011

TREASURES OF AUSTRALIA DIAMONDS 1OZ GOLD PROOF LOCKET COIN





TREASURES OF AUSTRALIA DIAMONDS 1OZ GOLD PROOF LOCKET COIN
  • Proof Quality 99.99% Pure Gold
  • Striking Reverse Design
  • Contains 1-Carat of Diamonds
  • Australian Legal Tender
  • Presentation Packaging
  • Limited Mintage
  • Numbered Certificate of Authenticity

Proof Quality 99.99% Pure Gold

This 2009-dated coin is struck from 1oz of 99.99% pure gold in proof quality.

Striking Reverse Design

The coin’s reverse design portrays an abstract interpretation of Australia’s stark and beautiful landscape.

Contains 1-Carat of Diamonds

The design surrounds a transparent half-circle locket containing approximately 1-carat of Australian natural rough diamonds. The most desirable of all gemstones, diamonds are a traditional symbol of love, and the modern birthstone of people born in April.

Australian Legal Tender

Issued as legal tender under the Australian Currency Act 1965, the coin bears the Ian Rank-Broadley effigy of Her Majesty Queen Elizabeth II on its obverse.

Presentation Packaging

The coin is housed in a presentation case with a jarrah timber lid featuring a circular viewing window. The case comes in a beautifully illustrated box shipper.

Limited Mintage

The Perth Mint will release no more than 1,000 of these gold proof locket coins.

Numbered Certificate of Authenticity

Each coin is accompanied by a numbered Certificate of Authenticity.

Collect the Complete Series

Scheduled for release between 2007 and 2011, Treasures of Australia celebrates five glittering prizes found in Australia: Sapphires, Opals, Diamonds, Gold, and Pearls.

www.perthmint.com.au

Monday, June 13, 2011

If Gold’s Going Up… Why Are Gold Stocks Falling?

If gold is going up...why are gold stocks falling?

In theory, a gold stock is worth the value of its future cashflow. So a stronger gold price should lift gold stocks. That’s pretty much the pattern we have seen in the past.

So in times of new highs in the gold price every few months, why are gold stocks falling?

Gold price goes up – Gold stock index drags lower


Gold stocks normally amplify the gains from gold. If gold goes up 10%, then a good gold stock should go up 20%. So traders look for this ‘leverage’ to the gold price in gold stocks.

That was until ETFs became such a big force on the market.

Now traders can invest directly in gold ETFs with borrowed money to get the same effect. It saves having to do all that annoying research into a gold company.

So with all that money heading for the ETFs – instead of the stocks – the gold price and gold stocks are diverging.

It looks like some of them are even short selling the gold stocks to reduce their risk. This suppresses the price of the gold stocks even more.

But the ETFs can only push this trade so far.

For one thing, wherever the price goes, gold stocks are still worth the price of their future cash flows. And as the gold price rises further, so does the stock’s value. Gold stocks at current prices are incredible value.

And good value will lead to good buying.

If we start to get bargain hunters taking this opportunity up, then at some point the traders will start having to close their short positions. This increases the price, and soon the traders could start a stampede as they all try to get out. This could lead to a big spike in the price, blowing up months’ worth of profits in minutes.

This will happen at some point, and gold stocks will go ballistic as they get back to where they should be.

Closing this trade would also mean selling the gold ETF. It’s amazing to think that the largest gold ETF in the world now holds more gold than most central banks.

Or so they say...

Apparently, the US Commodity Futures Trading Commission, with the Gold Anti-Trust Action Committee, reckon there is now one hundred times more gold in ETFs in the world…than physically exists above ground.

ETFs are convenient. They are the cheapest way to buy and sell precious metals and they have their role in the market. They let you buy and sell metal via Etrade or Commsec quicker than you can say ‘Goldfinger’.

At the other end of the spectrum, buying physical gold or silver metal is more expensive – because dealers charge a premium. You then have the cost of delivery, storage and insurance. Dealers also take their cut when you sell.

So why bother with bullion? For one reason – to avoid ‘counterparty risk’.

This is the risk of trusting another party with your investment. When you buy an ETF, the metal you buy is generally not held by the ETF provider, but by a large global bank like HSBC or Morgan Stanley.

Thankfully buying gold and silver yourself is easy in Australia. I took a look at how to do that in this month’s Diggers and Drillers, so readers had a full list of ways to buy and store gold themselves. This included a few ways to get bullion that you may not have thought of. But you might be able to turn up with a bit of research.

With precious metals stocks looking very cheap, and set to catch up with the gold and silver price before long, I have been busy recommending gold and silver explorers for the last few months. This month, as well as looking at buying bullion, I recommended a precious metals stock that could make a 600% return in the next few years. Not everything is overbought. There are still some value picks out there if you’re prepared to look. I’ve got another newsletter brewing, and have my eye on the next tip already.

You can make good money on good precious metals stocks. But I don’t think there’s any replacement for actual physical gold and silver ownership.