Tuesday , 25 June 2024

Which Is a Better Buy These Days: Physical Gold or Gold Mining Stocks?

So says Shaun Connell (http://livegoldprices.com/) in edited excerpts from his original article* as posted on Seeking Alpha.

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

Connell goes on to say, in part:

Plenty of investors have been saying that this a great time to invest…but there are a lot of variables, and there might be a good short term reason gold miners haven’t been outpacing gold. [Let’s take a look.]

Investing in Gold

The most obvious way to get gold exposure is to just buy the physical stuff or a gold ETF….but the problem with buying gold is that it’s connected only to the demand of gold. For some people, it simply does not have enough upside…and those individuals often start looking into gold mining companies….

Why Have Gold Stock Prices Lagged Bullion?

These gold mining stocks do not directly match the price of gold. Since most companies sell their gold through future contracts, they may not realize today’s spot price for several months. As such, their revenues typically lag the spot price.

As such, historically when gold mining companies have lagged the price of gold, they usually have a period following of outperformance compared to the price of gold. Since that has been the case for the first quarter of the year, gold mining companies could potentially be a good investment going forward…and since investing in gold mining companies is actually investing in a company, there is usually more upside potential and less downside potential compared to investing in physical gold.

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Over the last few years, gold miners simply haven’t kept up with gold. GDM and GDX, for example, have both trailed gold by nearly a 100% over the last 5 years…and there are others that are flat. There are, of course, penny stocks and medium miners that have done great, but most averages are level or down compared to bullion.

There are several reasons miners haven’t picked up the slack compared to bullion:

  1. Stocks have extra risk: They can go bankrupt. They can be nationalized. They can miscalculate their gold [reserves]. They can have accidents. They can whatever. There are literally thousands of variables that could destroy the companies in particular, much less slow down profits.
  2. Long-term bull isn’t certain: Not everyone is betting on gold for the long-term — there are a lot of short-term speculators. That’s why gold spiked so heavily in 2011, and gold mining stocks didn’t spike nearly as much — not even close. This lack of long-term certainty is priced into miners to some extent.
  3. Extreme long-term uncertainty: Some mining stocks…simply don’t have enough known gold in the dirt to last a… long amount of time. This is a risk. [Also,] it’s getting harder to mine gold…[while] gold’s price increasing can help, but it’s still a downward pressure on miners compared to gold bullion itself.

Is Now the Time to Buy?

There’s a chance that gold will drop…[if] the market is convinced (rightly or wrongly) of an imminent recovery….Billionaire Jim Rogers, [for one,] believes we’ll see some strong bubble-like economic recovery over the next year or two, so there’s a chance the price of gold could dip in the meantime.

Right now, [however,] the U.S. government has no real exit strategy for the insane deficits that we’re creating – except for money-printing, that is, and that means that gold prices are still a great long-term bet. Unless some sort of anti-deficit movement takes hold in the next five years, look for gold corrections as a time to buy into gold for the very long haul. Just don’t bet the farm – a well-diversified portfolio is always better than a huge lopsided bet.


The above are my reasons for adding to my position in physical bullion, and not miners. Unless something crazy happens and a good deal is revealed, I’ll likely keep this position and tactic for the foreseeable future.

*http://seekingalpha.com/article/573781-gold-mining-stocks-vs-physical-gold-bullion?source=email_macro_view&ifp=0 (To access the articles please copy the URL and paste it into your browser.)

Editor’s Note: The above article 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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