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« Gold and Silver moved by India, Hong Kong, Sentiment, et al. | Main | Gold: Watch This Wedge »

Mining Stocks or Funds The Tussle Continues

Metals comparison chart 02 September 2009.JPG

This is a constant conundrum as the physical metals, mining stocks and the funds rise and fall as investors re-position themselves with the view to taking advantage of any given set of investment criteria.

On the 27th July2009 we wrote the following:

From September onwards the broader markets could resume their decline in which case we could see investors looking for safety, whether that be in the dollar or via gold and silver remains to be seen, no-one knows for certain. We favour the PM Stocks and will hold onto our core position and look for opportunities to trade any aberration that we spot with our ‘opportunity cash.’

September has now arrived and there a number of producers that have moved from the overbought environment to a tempting oversold position. However there is more than one way to skin a cat and we need to constantly re-evaluate the vehicles open to us to use during this precious metals bull market. Gold and silver are going much higher in our humble opinion but how to 'play' this market raises a number of questions.

Most of us agree that holding some of our wealth by having physical gold and silver in your own hands is a must. This holding gives us direct exposure to any movement in gold and silver prices and if required can be used anywhere in the world as money.

Our next preference has been to accumulate gold and silver producers with the view that they offer leverage to the price of the metals and this has been true if we look at the period from 2001 to the present time on the chart above. However there are numerous risks associated with the holding of mining stocks. For starters it is a rather difficult and dangerous job to construct and operate a mine. Then we have other considerations such as management, physical access, geo-political problems, environmental issues, track record, reporting methodology, financing, etc. All of which have to be taken into consideration before we make a purchase.

Now take a look around and you will see that we live in a world of instant everything from coffee to action replays and todays investor is an 'instant' person looking for instant results without having to exert the brain too much.

So Madam Creativity spots this niche requirement in the markets and comes up with the range of funds to tempt us all. In the past we have been critical of GLD and other funds and we remain skeptical as to their robustness. However their popularity continues to grow with the introduction of each new fund offering a slightly different attribute to what is already available.

In our tiny sector there are funds that now offer a 200% upward movement to the price of gold. You can also short gold by investing in a fund offering 200% leverage to any downward movement in gold prices. If you go to and look at the Gold ETF List you will find a list of twenty or so ETFs and ETNS. ETNs are Exchange Traded Notes which purport to provide investors with a cost-effective & convenient way to take a short or leveraged view on the performance of gold.

So an investor or speculator can take a view on the market, bullish or bearish and then use one of these vehicles to gain exposure to gold or silver. An aggressive trader can opt for a vehicle that is offering a 2:1 ratio against the performance of gold or silver and a really aggressive investor can buy options on the funds.

By using one of these vehicles an investor does not have to consider the political situation in Namibia, the environmental issues in the arctic, the reshuffle of the board of directors at ABC Limited, the availability and cost of energy in a particular location, the availability and cost of labour, etc.

Just take a view and place your bet its that simple.

All of these investment choices divert money from going into precious metals exploration and producing enterprises. If you are an investor in a gold fund then its not in your interest to see the mining sector prosper, they are your enemy, the sooner they go to the wall the more valuable the physical metal will become increasing the value of the fund.

Taking a trip down Memory Lane we posted this article on the 30th April 2008 entitled 'Leveraged Gold ETF’s: The End of Gold Stocks'' - here are a few excerpts:

But now the whole investment landscape is changing…

The whole problem that we had with the gold ETF’s is that they didn’t offer the same leverage as gold stocks. However these new leveraged ETF’s may solve this problem.

In the last couple of months we have seen the emergence of some new gold ETF’s offering 200% exposure to the gold price. With many gold stocks barely offering 1:1 leverage to gold in the recent rally, these investment vehicles appear very attractive to us, and no doubt to other gold bugs.

In fact, with these new leveraged gold ETF’s is there actually a need to own gold stocks?

So we see very little reason to buy positions in gold stocks in the future and we are going to give some serious thought to moving from mining companies to leveraged ETF’s over the coming months. If 200% exposure isn’t enough, then one can always buy on margin and increase that leverage to 400%. One can also go short by buying an inverse ETF, allowing one to profit from both the ups and downs of the the bull. Gold stocks may get a boost in the final leg of the bull market though, as “the herd” stampedes in and forks out cash for anything that glitters. And of course, the gold mining companies will still make a lot of money as gold prices continue to rise, but we feel the ETF’s offer a slightly better deal. Also, bear in mind that the 200% leverage offered by ETF’s is a mathematical relationship, whereas the leverage from mining stocks is a rough estimate of what might happen, in other words: a hopeful guess.

Is it possible that we could have a gold and silver bull market without the producers taking part? Well if history is anything to go by the answer would be no as the above chart clearly demonstrates. However these new bright and shiny vehicles were hardly known about in the past but they intend to play a part today and tomorrow.

The chart below shows a comparison between the performance of gold, silver, street tracks and the gold bugs index, the HUI. As we can see in late 2007 the HUI lost its leverage and has yet to outperform gold or silver and regain its position at the top of the chart.

Metals comparison chart for last two years 02 sep 09.JPG

For now we will leave the conclusion open suffice to say that these new vehicles cannot be ignored and may well have a profound effect on the way we invest in the future.

So to all of our readers we throw down the gauntlet and ask you why any of us should be holding precious metals stocks?

Have a sparkling day.

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Reader Comments (7)

Please rethink your advice on leveraged ETFs. Many people who have used them in the past (financial, oil, gas, etc) have been badly burned.

The majority of them rebalance *daily*. Thus you will only track the underlying index for a few days -- at best! Almost all these funds (positive *and* negative) have dropped massively over time.

September 2, 2009 | Unregistered Commenterjoelandsonia

I will say it again, and it has already been said and explained and shown by others much more eloquently than I-- most of the ETFs are frauds and worse: they are there PRECISELY to divert investment money away from the physical PMs and their equities. BUT EVEN MORE, it would appear that those banks / financial institutitions who "back" and control them have set them up to be their "short coverage" for their humungous naked shorts against gold and silver on the COMEX. And all, except for the genuine ETFs (such as CEF and GTU and the new silver ETF by the same folks, which DO have the audited gold and silver in their vaults available at all times to be seen by investors), have backdoor, "get-out-of-jail-free-card" verbiage should there be a COMEX default where they do not have to provide the physical metal if they can't get their hands on it.


And if you think I exaggerate, you are either willfully ignorant or willfully blind or just too lazy to go and understand who they are and what they have done (and continue to do) to us.

Buy physical gold and silver, to be sure. Buy PM equity shares, if you want the risk, but for the life of me, don't go buying GLD et al. You might as well take a gone and shoot yourself in your investing foot, b/c in the longrun you're being ripped off bigtime. jt

September 2, 2009 | Unregistered Commenterjt

I am an unsophisticated U.K. value investor and find it hard to see what you are buying with these funds. Surely when you buy a stock you are buying a share in a tangible asset, but what do you own in a fund? Sure, shares in that fund but what does that mean, and where does the 200% come from? Who has produced it, how is it manufactured? I have a fear that you may be being drawn down the slippery slope leading to derivative halucination land where money appears out of nowhere and can go back there just as easily. Is this not the antithesis of precious metals investing?
Great mails, always look forward to resding them.


September 2, 2009 | Unregistered CommenterBen Nicholls

Hi Bob

Thought provoking article.

I have owned some leveraged ETFs and from my own observation have seen them go in the opposite direction they should at times - not performing as well as advertised (service fees and rollover of contracts drain these puppies).

I think they are more easily manipulated and used to manipulate the price of the metal itself as well.
The big concern I have is governments changing the rules and possibly ending derivative trades (as the whole world now knows that's wat brought on and will continue to drive this financial crisis).

Final thought against - If gold and silver were to become the backing for currencies once again, Jim Puplava and others believe governments would confiscate the ETFs hoards - not sure how this would affect things though,.

All the Best

September 2, 2009 | Unregistered CommenterD

And if you think I exaggerate, you are either willfully ignorant or willfully blind or just too lazy to go and understand who they are and what they have done (and continue to do) to us.

JT be a little more diplomatic

September 2, 2009 | Unregistered Commenterdococ


We have had a number of emails on this subject so we thought it worthwhile to raise the issue. Our position, as regular readers know is to hold some physical gold and silver, their associated stocks and some opportunity cash.

We have no cash in any of the funds.

However they are here and we need to be aware of their magnetic effect in terms of steering money away stocks.
Gold is close to $1000/oz and the HUI is 383.66, it should be close to 450-500, so it is lagging behind. Maybe we are in for a tremendous rise in the HUI which would be great for all of us, but GLD, for instance has come a long way in a short time and we need to be aware of this and the way other investors are thinking in terms of their strategy.

September 2, 2009 | Unregistered CommenterGold Prices

Bob, What comes up for me is the argument I recently read that the gold stocks have been in a 3 year go nowhere place JUST LIKE THE TECH STOCKS DID.

The tech stock boom was 5 great years, 3 go nowhere years and then 5 fabulous years ans the mining stocks are following the same pattern to a T. So one couldn't use the last 3 years on mining stock performance and make any kind of decent projections--sentiment is lousy now and when the worm turns sentiment will EXPLODE and this tiny sector -PM miners-- will be on its way to the moon and the leverage will be breathtaking or at least that's my opinion and I have been a PM investor since 1996 and have lived through the high times and the low times and the stage is set for the next period of explosive leverage of the PM miners to the PM.

Thanks, C

September 11, 2009 | Unregistered CommenterC

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