Thursday , 25 July 2024

Gold Bulls Shouldn’t Buy Gold Stocks!

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With the Bank of Japan’s latest move to fight deflation and seemingly to start another round of global competitive currency devaluation, it…makes sense to hold some gold in a portfolio. However, I remain of the opinion that it makes no sense for gold bulls to hold gold stocks over bullion. [This article explains why that is the case.] Words: 281

So writes Cam Hui ( in edited excerpts from his original article* entitled Where Is The Leverage To Gold?

This article is presented compliments of (A site for sore eyes and inquisitive minds) and (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Hui goes on to say, in further edited excerpts:

Consider this chart below of the price of gold compared to the Amex Gold Bugs Index (HUI).

(click to enlarge)

The top panel shows the price of gold in black and HUI in red. The bottom panel shows the HUI/gold ratio. A rising ratio indicates positive leverage to gold and a falling ratio shows falling leverage. The HUI/gold ratio rose and peaked out in late 2003. It then flattened out and started to decline in 2005 and continues to fall today.

I wrote about this topic in 2011 and 2009 and it continues to be true: Gold bulls shouldn’t buy gold stocks! The reason why gold stocks have failed to keep pace with the price of bullion is gold mining companies can’t replace lost production at the same cost as the older cheaper ore bodies get mined out. They are mining lower and lower grade ore and therefore their profits and cash flows are lower because of higher production costs (see my analysis Valuing gold stocks on cash flow, not assets).

Bottom line: If you are a gold bull, buy physical gold, GLD, CEF, or any other vehicle directly related to the price of gold. Just avoid gold stocks.

Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.


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One comment

  1. Good article!
    I’d like to see a comparison between holding physical PM’s and those that buy and hold (long term) PM stocks (not mining stocks).