Which Is the Best Buy Now – Gold or Gold Stocks?

So says Jason Hamlin (www.goldstockbull.com) in edited excerpts from his article entitled Gold vs. Gold Stocks – Which is the Better Investment?

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), may have edited the article below to some degree for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.

Hamlin goes on to say, in part:

Then

If you have been aboard this bull market since the beginning, you remember the incredible leverage that mining stocks once offered.  In fact, during the first five years from 2001 to 2006, gold shot up 92%, but the HUI mining stocks index went up an astounding 648%!  Put another way, you would have realized seven times greater returns by investing in mining stocks versus the physical metal during those early years but this leverage did not last very long.

 

Now

Following the incredible run for gold stocks, the period from 2006 until present has seen the HUI advance by only 39%, while gold itself has shot up by 232%.  In this period, you would have realized six times greater returns by owning physical gold than by investing in mining shares.  This is the polar opposite of the relationship witnessed between gold and mining stocks in the previous period.

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From Then Until Now

Combining both periods and tracking the performance of gold versus gold stocks for the entirety of the current bull market, we see that gold stocks have still been the better investment.

From 2001 until today (Nov 12, 2012), physical gold has appreciated by 537%, an impressive gain considering that the stock market has only returned 7% in the time period. However, gold stocks have gone up nearly twice the rate of gold, for a gain of 936%!  This is the leverage that seasoned gold investors remember and it drives the decision to allocate a significant portion of their portfolios to mining stocks.

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Today

Today, many investors wonder if the leverage experienced in the early years will once again return.  One positive sign for those holding mining shares is their recent performance versus bullion in the latest run.  Since the start of August, gold is up 8%, but gold stocks are up 18%, for leverage of roughly 2.4X.  If this is any indication of what the remainder of this upleg has in store, it appears that gold stocks may once again return to outperforming the underlying metal.

I put together one more chart to help give investors determine whether bullion or mining stocks are the better value at the current time.  This chart shows the entirety of the current bull market and charts the relationship between the AMEX Gold Bugs Index (HUI) and the gold price.  I’ve added a dividing line at the half-way point to help illustrate when mining stocks are overvalued or undervalued versus gold.

 

As you can see [from the above], we are currently at a point where gold mining stocks are significantly undervalued relative to gold…but, if this ratio returns towards its historic norm or swings back towards gold being undervalued, then we can expect mining shares to continue their recent run of outperforming gold by 2X or greater (assuming that one were to simply buy the Market Vectors Gold Miners ETF (GDX), which tracks very closely…against the HUI Gold Bugs Index.

[Furthermore,] I believe that by doing your due diligence and researching quality mining stocks, investors can significantly outpace the gains of an index such as this. [For those few who are aware of mining company long-term warrants I believe you can double the performance of the HUI/GDX and even more so with the long-term warrants of gold & silver streaming companies. See links to articles on warrants and “streamers” below.]

*http://www.goldstockbull.com/articles/gold-versus-gold-stocks/ (Sign up for FREE email updates)

Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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