Friday, October 8, 2010

Gold ETFs Killing Gold Miners


Gold ETFs Killing Gold Miners

By: Marco G.

October 8th, 2010

http://goombarhsedge.blogspot.com/


What does this title mean?  The author was perusing an article about commodities investing this past decade and came up with a startling revelation.  Since the advent of the large Gold exchanged traded fund GLD in 2006, the author has noticed a serious lagging of leverage for the large cap Gold miners.  Gold miners are not producing gains higher than that of the underlying Gold price.

Gold Miners Not Providing Leverage

As analyzed in my previous article, “Peak Gold or Gold Corp Overpays for Andean”, the major Gold miners are not providing leverage from the underlying Gold price.  Gold gains 10% in price and the miners gain 10% in price.  True the mining equity is marching along with the Gold price moves, but the equity should compensate the investor with more gains and leverage for taking the increased company specific risks of investing in a company stock.
Gold, the metal itself does not have company specific risks, whereas each mining equity carries a whole cartload of risks including country location, mining performance, governmental and environmental, geological happenstances and so on and so forth.

Mysterious Myth of Miners Leverage by Hardrock

As further support of this theory, examine the information presented by fellow Seeking Alpha contributor “Hardrock” here. 
One of his charts was so striking, that I have reproduced it here following:
Figure 1:  Source:  Mysterious Myth of Miners Leverage,  http://seekingalpha.com/instablog/415953-hardrock/84134-mysterious-market-myth-of-miners-leverage

The GDX has been underperforming the Gold price.  I am sure that the majority of investors out there would not be aware of this Gold stock underperformance and would be shaking their heads in confusion.  This runs contrary to established mining lore, where the equities leverage the price of the underlying metal.  This is startling information indeed and this has many implications for precious metal investing.

Ease of Investing in Gold ETFs

If you are like me, before you make any investment in a company, you spend days, in reviewing financials, analyst reports, websites and investment blogs trying to understand the company and their prospects for future growth.  Well, is not investing in the GLD ETF a whole lot easier?  No research or due diligence required.  Just put out the capital and you are done.
Monies that would have been put into investment in large Gold mines are now a lot easier put into the GLD ETF. 

Summary

Large Gold companies are now not providing any leverage to the underlying Gold price because of the ease of investing in the new Gold ETFs.  Welcome to the brave new world of precious metals investing.

2 comments:

  1. Once miners/producers start paying good dividends, (and with high bullion prices producers should be making some nice profit) many will start pilling in. Institutions. And that's when they should outperform bullion big time.

    It is coming....

    ReplyDelete
  2. I am learning about blogs and like what you did in yours blog.Bullionist

    ReplyDelete