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Golden Equities


As many of you may be aware, Mark is out of the office for a few weeks.  In his absence, he has asked us to keep the blog updated.  I am Charlie Osborne and have worked with Mark for the past three years.  I will be writing this weeks commentary and John will add some thoughts in the next week or two.

One of the questions we have been getting of late is why gold stocks have not been going up given the ongoing problems in Europe.  It seems quite reasonable to think that with the ongoing currency crisis, money would be flooding into gold and the related stocks; however, this has not really been the case (at least so far).  I have attached a chart ( that shows the past 18 or so months of the S&P 500 (orange line), GDX (ETF that represents a composite of large and mid-sized gold mining companies, black line on chart), and GLD (ETF that represents the price of gold itself, blue line on chart).

 18 Month Gold Miners


What you will notice is that the price of gold is up roughly 20% in this time, but the vast majority of that gain came in a couple months.  You will also notice that gold mining stocks (GDX) have greatly underperformed both the overall stock market, as well as the spot gold price over the 18 month time frame.  Intuitively, this does not make a whole lot of sense, since the gold mining companies are making quite a bit of money now (at least the well run ones).  So, there is really two questions here, one being why has gold not gone through the roof (up 20% is still a decent return, but many out there thought it would go up huge); and the second question is why have the gold stocks lagged so much over the past year and a half.

The key argument I hear for why gold should be screaming higher is that it would seem the most logical place for money “leaving” the Euro.  It is true that the Euro has fallen in price in this timeframe; however, it looks like the assets that have seen the majority of the demand increase are US treasury bonds and the highly liquid US blue chip stocks.  The demand for these “safe (or safer) haven” assets has really increased.  I think part of the outperformance of US blue chip stocks over the rest of the stock market in the past 18 months can reasonably be attributed to this “flight to safety” response worldwide.  So, while gold has benefited somewhat, other US assets have also soaked up the demand.

The more puzzling question in my mind is why have gold stocks lagged the spot gold price.  There is no clear cut answer.  Part of it stems from the increasing costs of gold miners, which means that even though their revenues may be increasing, their costs are too, so the net profits don’t go up much.  This is true in some situations, but well run gold miners have actually held their costs down pretty well, and have seen their revenues rise.  So, maybe the answer is that the stocks of these higher quality companies have been irrationally held down, and they may make for good buys around these prices. 

*We are buyers of gold stocks today (through various stocks, ETFs, and funds).  The performance disparity between gold stock prices and the metal itself will not last forever.  Most likely, the performance gap will close quickly when it happens, as has been the case for the past month.  If you look at what happened back in the middle of June, 2011 through September, 2011 (another time when miners were pretty low in relation to the spot gold price), the mining stocks rose almost 30% in three months.  They later gave back those gains, but it does show that the prices can rise very rapidly on undervalued assets when sentiment changes.  These stocks will be volatile, but we think they will do well from these prices.  The final chart shows the past month with the same assets as the first chart.  Prices can change quickly.*

1 month GDX