Posts Tagged ‘Stocks’

Gold Vs. Miners: The Wrong Question, Part I

October 15, 2011 2 comments

Submitted by Adrian Ash | BullionVault


Over the last 5 years, gold has turned every 1% gain in Gold Mining stocks into a 2% rise…

WHY are Gold Mining stocks underperforming the metal? asks Adrian Ash at BullionVault.

“Gold stocks should be a levered bet on the price of gold…There has been a terrible underperfomance,” as one forum posting said back in June.

“Thought this could be a good hedge against market meltdown but doesn’t follow gold price,” said another Gold Mining fund holder in August.

“Switched my portfolio to Blackrock Gold Acc in Feb. ’11 with the naive thinking it would give me a good exposure to Gold Prices,” said a third. “Gold has jumped 30% since then, but the fund is pretty much at the same price.

“I know there must be a lot of people in the same situation.”

Too true. February 2011 saw retail investors using UK brokerage TD Waterhouse choose Blackrock Gold & General as the top holding in their tax-protected ISA accounts for the third year running. And why not? Over the 12 years to this spring, as Blackrock’s own website says, its Gold & General Fund was the best-performing ISA product bar none. “Our investors,” said TD Waterhouse, “appear to be seeking some solidity in light of the continued Eurozone sovereign debt crisis and concerns over possible future inflation.”

Solidity paid off, but Gold Mining stocks didn’t. Over the next 6 months – and as the Eurozone debt crisis hit fresh peaks, and UK inflation held at 20-year highs above 5% year-on-year – gold put on 29% for Dollar investors and rose 27% for UK buyers. Gold equities, in contrast, lost 16% on the XAU index of US-listed producer stocks. Fighting the headwind of a falling Dollar, Blackrock’s Gold & General fund could only cut that loss in half for its UK investors.

“We’re confident the gap will close,” said Evy Hambro, manager of the £3.3 billion mining-share fund ($5.2bn), to the Financial Times in September. “It has always closed in the past. This is an abnormally long one and an abnormally large one.”

But how long? And how abnormal exactly? No one’s expecting the answer which the data throw out.

“Gold shares historically outperform Gold Bullion in a rising market due to the operational gearing,” says another UK-run gold fund in its sales literature. That’s because, in a bull market for bullion, you’d expect Gold Mining firms to have “fixed or semi-fixed costs [but] rising revenue stream.” So you might even expect that famed 2-to-1 or 3-to-1 leverage over the gold price cited so often in mining-stock stories online.

But no. Here’s the percentage-point gap between Gold Bullion and nine different gold-equity plays, as of Sept. 30th this year…

Year-to-Date 1 year 3 year 5 year 10 year 15 year
XAU Mining Index -18 -29 +56 -129 -198 -260
HUI Index -7 -19 +100 -98 +257 -100
Barrick (ABX) -14 -23 +35 -108 -212 -207
Newmont (NEM) +3 -17 +69 -121 -251 -267
US Global fund -10 -24 +154 -51 +545 +327
Tocqueville fund -18 -27 +195 -62 +403 n/a
Van Eck fund -15 -26 +163 -55 +474 0
Blackrock fund* -30 -30 -31 -111 +275 +184

*Relative to gold in GBP               Source: BullionVault via Bloomberg, Yahoo

Three things jump out, as you can see:

  • First, not all Gold Mining stocks, indices or managed funds are the same, not by a country mile;
  • The right miners (and the right funds) performed as expected if you bought them far enough back, outperforming gold bullion by a good margin since 1996 or 2001;
  • Three years ago – October 2008 – was a one-time chance to pick up Gold Mining equity at such a wide discount, even shares in the biggest, lumbering producers have since beaten the investment return on plain gold bullion.

That opportunity to beat gold with stocks was very rare. Take the Philadelphia Stock Exchange’s XAU index of gold and silver miners, for instance. Its plunge amid the Lehman Brothers’ meltdown of 2008 made October that year the only month-end to offer the opportunity of out-performing gold bullion’s gains today since the XAU index was launched in 1983. Yes, really.

On the Amex Gold Bugs Index (the HUI), only 12 separate months in the last 120 have now seen new buyers out-pace gold bullion at today’s levels. For the UK’s actively-managed BlackRock Gold & General, it’s four months in the last nine years. For US Global Investors, 11 months in the last six years, and for the Tocqueville Gold Fund, it’s 20 months in the last eight years.

Underperformance in gold-mining equity is thus starting to look the norm, not the exception. Not only the producers as a group, but also the two biggest gold stocks (Barrick and Newmont) and even the top-performing managed funds are lagging it badly over 5 years, 1 year, and 2011 to date. Leverage to the Gold Price it ain’t.

Since Oct. 2006, in fact, every 1% move in the Gold Price has seen the Gold Mining producers add just 0.4% to their stock price on the HUI index. So far in 2011, they’ve turned every 1% gain into a 0.2% loss on the XAU.

The question, therefore, isn’t why the miners and funds are lagging gold. It’s why does gold keep beating the equity? Why has it reversed the expected leverage, turning every 1% rise in Gold Mining stocks into a better than 2% gain since 2006…? And might it be that this “abnormality” is in fact critical to the underlying bull market in bullion?

More to come in Part II. Meantime, are you ready to Buy Gold…?

Adrian Ash, 13 Oct ’11

Credit where credit is due

September 24, 2011 9 comments


“When you own gold you’re fighting every central bank in the world”. Jim Rickards

To a great extend, that holds true for silver as well. This week, holders of Political Metals lost a battle, but certainly not the war. Measured against the USD, gold and silver are worth less compared to a week ago by 9.6% and 26.3% respectively.

It all started with Ben Bernanke’s statement, following the 2-day FOMC meeting, stating the obvious - that “there are significant downside risks to the economic outlook, including strains in global financial markets”. His antidote was a plan to purchase $400 billion of long-term Treasury bonds and to sell an equivalent amount of short-term debt. More commonly referred to as “Operation Twist 2″, this plan seeks to further reduce long term interest rates, after having pledged to hold short term rates practically at zero until 2013.

That announcement, made in the backdrop of the Eurozone debt crisis and news of slower growth in China, sent global stocks and commodity markets into a waterfall decline. This set up was ideal for the bullion banks who have massive gold and silver short positions. All they needed to do was to pull the trigger, and that’s exactly what they did on Thursday. Silver was pushed down sharply through its key 50 and 200 day moving averages, triggering an avalanche of tech funds selling the following day.

Going for the final kill of the week, news of yet another margin hike by CME (gold by 21%, silver by 16%) leaked into the market towards the end of Friday’s trading day. That further fuelled the selling, pushing silver briefly below $30 before closing at $31.08 - down 26.3% for the week.

In other markets this week, the Dow suffered its biggest loss since 2008. In four days U.S. stocks lost $1.1 trillion in value.  The MSCI all-country world share index (tracking thousands of stocks from developed and emerging countries) recorded its second worst quarter in 23 years and the 30-year bond rates dropped 55bps - the biggest move since the 1987 Black Monday.

So there you have it, Dr. Ben Bernanke, bullion banks & CME working together in perfect harmony. I don’t believe for a moment that the resulting market turmoil was any surprise to Bernanke. Despite saying that gold is not money, he’s smarter than most people made him out to be. After all, he achieved an SAT score of 1590 out of 1600, graduated from Harvard and has a PhD in economics from MIT. Contrary to its statutory mandate of foster maximum employment and price stability, this market turmoil I believe is a piece of precision engineering to achieve some larger agenda. This round is yours, congratulations Ben!

This engineered global markets take down could be part of the deflationary phase that Mike Maloney talked about, which is a prelude to the hyper-inflation phase. They have to assist the bullion banks cover their shorts and bring the Political Metals price down to a lower base before starting the next round of QE or equivalent. Marc Faber told ThomsonReuters that “if the S&P drops to around 900-950, we’ll get QE3 for sure”.

Four ways to view the developments over the past week

If you’re reading this blog, you’re not a professional or a day trader, possibly someone already invested in gold or silver, someone holding some Political Metals (I distinguish between investing & holding here) or someone in the process of researching the matter. As non professional traders, we have to look through and not at the turmoil unfolding before us. All of the bloody carnage above are on “paper” or bits on silicon - illusionary financial derivatives of something tangible (like gold and silver) or derivatives of something totally virtual and non-physical (like interest rates, bonds, debts, CDS, etc). Real or imaginary, they are all derivatives backed by nothing more than a promise or lies of a third party.

Unfortunately, in so far as gold & silver is concerned, the outcome of the imaginary paper price wars above gets applied to the physical world. Price discovery currently comes from the paper derivatives market. Banks and multi billion dollar hedge funds throwing thousands of futures contracts or bets at each other (most of which are done through computerised High Frequency Trading algorithms) determine the price of the coin or bar you pick up at your local bullion dealers. Until such time when this absurd situation of the tail wagging the dog changes, I suggest 4 possible ways for you to view the developments over the past week, using silver as an example.

There’s a big difference between Investing(1) & Holding(2). If you adopt approach (1), and are smart enough to handle scenario (3), congratulations! Trading this dip or swapping silver for gold just before the GSR shot over 56 would have reaped a handsome return. After years of following newsletter writers, both paid and free, I came to the conclusion that attempting to achieve (3) is at best illusionary, and at worst risky. This is particularly true in a manipulated market. Take a look at some of the forecasts by well respected industry players here. Either they missed this week’s price action or are not telling us something. Richard Russell puts it this way:

I look at gold and silver, not as a play for profits, but as an accumulation of hard assets, in a world that it drowning in fiat money, and a world that will probably print trillions more of irredeemable paper.

Finally, if you’ve been waiting patiently (4) or have spare dry powder, congratulations! While the paper price of gold & silver gets whacked, physical demand is very strong. KWN reported that Sprott Money temporarily runs out of physical silver. So, get ready to pick up your discount. Not necessarily immediately, but then again, picking the absolute bottom can also be illusionary. Best industry advise is cost averaging.



Has gold reached an intermediate top and entered into a multi-month correction phase?

September 13, 2011 2 comments

After the massive silver take down on May 1, and after several weeks of consolidation, there was much uncertainty as to the direction of silver. On June 21, we featured an article from Richard Guthrie which helped answer the question Silver: Will it be Up or Down? He wrote:

I implore all those still nervous about getting onto this silver rocket to take a long hard look at the following graph.

Based on his analysis, he was certain it was going to be UP. Sure enough, 1 week later, silver started its climb from $33.50 right up to $44, when it was taken down yet again on Aug 23, together with gold. Now, after about 3 weeks of consolidation, there’s this lingering question - Has gold reached an intermediate top and entered into a multi-month correction phase?

True to form, Rich has written another great analysis on why he think it has not, this time by looking at the gold miners price action. This is his story, told with a series of 7 convincing charts.


By Richard Guthrie (Live from ‘The Bridge of the Silver Rocket Ship’)

Much of the technical commentary I’m reading is still short term bearish on the direction in the precious metals and there are concerns we’re started a multi-month correction.

However they have conveniently forgotten to include within their analysis the recent action of the miners.

I have charted below the action of the Price of Gold and circled each occasion in the last 8 years when the Price of Gold has topped out and has entered a multi-month correctional phase.

Now let’s look in further detail at the action of the Hui (Gold Miners) Index during those periods of topping out.

The charts below show the Hui price action (Candlestick) with the Price of Gold overlaid (Black line).

Early 2004:

Late 2004:

May 2006:

March 2008:

December 2009:

So on every multi-month Top in the price of Gold throughout the duration of this Bull Cycle to date the Hui index has always topped out before the price of Gold.

Now let’s look at the present action in Gold and the Hui Miners.

As the graph clearly attests while the Gold price peaked (on a daily close basis) some 3 weeks ago in mid August, the Hui Index has been continuing higher and has risen a circa 5% more since then.

In summary, the action of the miners does not indicate that we have reached an intermediate top in the Gold price. If history is to be our guide we should be back to record highs in Gold in the very near future and this present up leg should have plenty more upside to come.

It’s ironic that the ‘Corrective Bear Callers’ always like to make a mockery of the phrase, ‘This Time It’s Different’. Well if indeed we have just topped out in the Gold Price then this time ‘It would truly have to be different‘ from every other intermediate top in this Bull Cycle to date!

I personally don’t believe it will be different and still have every confidence we’ll be well over $2,000 within the next month or so, And that’s where my money lies,

It seems Bully Boy’s shaking a few more weak longs out of his saddle before the next charge north, And who can blame him, No one likes to run with too much weight on his back!