One of the big debates of 2011 was whether the performance discrepancy between physical gold prices and gold equities was going to diverge back to normal. As you may recall, gold equities grossly underperformed gold bullion throughout 2011. For most of the year, gold prices traded anywhere between 15 to 40 percent higher than their equity counterparts. [How will 2012 end up? Here are my views.] Words: 700
So says Amine Bouchentouf (www.HardAssetsinvestor.com)in edited excerpts from his original article*.
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.
Bouchentouf goes on to say, in part:
As 2011 closed, the market experienced a gaping difference between gold stocks and physical gold. Specifically, while gold bullion prices in 2011, as measured by the SPDR Gold Shares ETF (NYSE: GLD), were up 11.64 percent, gold equities, as measured by the Market Vectors Gold Miners ETF (NYSE: GDX), were down 14.50 percent.
Fast-forward to today, and the divergent performance between GLD and GDX still exists. While GLD is up 6.14 percent year-to-date, GDX is down 9.71 percent. Going forward, expect this divergence to continue and, for the reasons below, gold bullion will continue outperforming gold equities for the rest of 2012.
Volatile Stock Markets
Gold stocks are just that, stocks that are traded on global capital markets on a daily basis. As such, they are treated by investors first as stocks, and then as physical gold proxies. Ever since the financial crisis of 2008, global capital markets have never fully recovered their previously steady state of affairs. Since 2008, markets have been characterized by extreme and unpredictable volatility.
Let’s use initial public offerings (IPOs) as a measure of market stability. Prior to 2008, the NYSE and Nasdaq had a steady and certain stream of IPOs coming to market. Since 2008, the number of IPOs has dropped off a cliff, down some 40 percent and, even more alarming, is the number of canceled IPOs — companies who were prepared and geared up for an IPO but were forced to postpone or even cancel their stocks sales due to volatile markets….
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Canceled and postponed IPOs provide a dramatic and clear view of the volatility that has been plaguing financial markets. Very few segments of the market have been spared, including commodities and mining. Mining equities, especially gold miners, have been depressed by this market volatility, fueling the underperformance relative to gold bullion.
Unfavorable Economic Conditions
In addition to volatile markets, economic conditions for mining companies have also created head winds for earnings and revenue growth. Even though demand for physical bullion has remained steady, operational costs have been increasing keeping mining company earningd down. Costs such as:
- labor costs are increasing due to a lack of qualified mining engineers, workers and operators,
- energy costs, which can make up more than 50 percent of operational costs, have been steadily increasing as well and, finally,
- many mining jurisdictions are tightening environmental standards so that mining companies are spending more on environmental permitting and licensing.
These extra operational costs are eating into mining company earnings and when you couple that with volatile global equity markets, it’s no surprise that gold equities have underperformed gold bullion.
On the other hand, demand for physical gold has been very steady and has even experienced a persistent increase on a quarterly basis [for the following reasons]:
- Gold is seen as a safe haven by investors. In an environment where governments are printing lots of money to stimulate stagnant economic growth, investors are turning to the yellow metal as a reliable store of value. Ironically, volatility is at the heart of gold-stock underperformance and strong demand for gold bullion.
- Demand from Asia, especially China and India, has been increasing as rising incomes in the region are causing more physical purchases and
- central banks have become large purchasers of bullion, which results in large purchases that create a floor for prices.
All in all, gold bullion will continue to outperform gold equities for the rest of 2012. One way to benefit from this trend is to go long GLD while simultaneously shorting GDX.
*http://www.hardassetsinvestor.com/the-commodity-investor/3682-the-commodity-investor-gold-stocks-will-continue-to-underperform-gold-bullion-in-2012.html (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.
Before we end the year we will hit new highs in both [gold and silver]. Then the mining stocks [will] react. The big problem has been [to date has been that] there is not this momentum in the prices of bullion, which is keeping people away from the gold stocks. If we can get the price of gold and silver going back up, I’m sure people will come back into the mining stocks.
We’re invested in gold stocks not just to make money, but for the chance to change our lifestyles and with their lackadaisical [dare I say dismal] year-to-date performance, one may begin to wonder if they’re still going to bring the magic. [Here are my views on the subject.] Words: 740
If we’re not at a bottom [in gold and silver and precious metals stocks], we’re very close to it. The sentiment is dismal and you can see that particularly in the stocks which are almost tragic. I’m shocked quite frankly at the valuations and how low they are. In the fullness of time, this will be seen as one of the great buying opportunities of all-time.
Whatever their reasons, the number of investors wanting exposure to gold is increasing. Many who ignored it a decade ago are now buying. Those who started buying, say, five years ago, continue purchasing it today in spite of paying twice what they paid then. Slowly but surely, it’s becoming more important to more people…but what happens when it becomes a must-own asset to a substantial majority instead of a small minority? Sure, the price will rise, probably parabolically, but putting aside speculation on the price of gold for now, have you thought about what happens if you have trouble finding any actual, physical gold to buy? [Let’s explore that possibility and what that would mean for gold stocks in such an eventuality.] Words: 870
We’re making history here. Gold stocks have never been this undervalued before. We’ve had a 12 year bull market in gold, but we’ve also had a 15 year bear market in the mining shares…It’s very rare in market history to see an outlier like this. This is an extraordinary event. Years from now we are going to look back and shake our heads in disbelief at how undervalued gold stocks were in 2012.
Great fortunes are made at super-bear market lows but you must have the money at the lows. [That is precisely] why gold is so singular and valuable. If you have gold at the bottom of the next bear market, you can exchange it for a collection of great common stocks or funds, and then sit back and relax.
Nick Laird has put together an Elliott Wave theory prediction using ‘The Golden Mean’ & ‘Fibonacci Sequences’ to arrive at future prices for gold…which he is hopeful will serve as ‘a roadmap which gold may take as it climbs to new highs’. See the chart below. Words: 625
“There’s no cliff here. There’s no need to panic whatsoever…[In] the two previous bull markets in gold, 1980 and 1934, gold ended at essentially a 1/1 ratio with the Dow Jones and the Dow today is over 13,000. Would I be surprised to see gold past $10,000? No. I know it sounds crazy but it sounds a heck of a lot less crazy than it did five or six years ago.”
We are all focused on the short-term and that’s natural, but let’s step back and look at the longer-term picture…We know the debt levels are too high today…but, because less than 1% of world financial assets are in gold, we have yet to really see the gold market react to the massive global money printing binge of the last 10 years. Once the gold market starts reacting to all of this, that’s when gold is going to go exponential. It doesn’t matter whether investors are buying gold at $1,600 or $1,800, it’s irrelevant in the long-run. What’s important is they are invested in physical gold in order to preserve their wealth. [Let me explain why.]
In my opinion, there are three scenarios that could occur in the coming years when analyzing the global economy – and all three have the potential to offer bullish environments for the price of gold. [Let me explain the first and most likely reason.] Words: 660