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« OptionTrader: Your Money Back If Gold Doesn’t Trade Above $1265 in 2010! | Main | US Dollar To Fade As Gold Heads Higher »

Are Gold Stocks worth the effort?

SLW compared with gold six year chart 14 August 2010.JPG

We recently posed this question while while re-assessing our silver portfolio and concluded that we were currently not getting the leverage to the metals that investing in the stocks should return given the inherent risks associated with mining operations.

We kick off with the following probe:

Question: What is it that we are trying to achieve?

Answer: Exposure to the Gold Bull Market.

Which vehicle will give the best returns and enable us to maximize our profits?

1.Physical metal
3.Silver producers
4.Options and/or futures trades.

The physical metal in your very own hands negates any third party risk and from time to time does perform better than the stocks as it has done recently, for instance.

The funds, some of which may or may not have the physical metal, track gold prices and are liquid for those who wish trade on a frequent basis.

The gold producers suffer from the numerous inherent risks of mining but do offer leverage to gold prices, but not on any consistent basis.

The options and/or futures trades can provide wonderful returns but they are risky and can also wipe you out completely.

For a pictorial view of this situation we have plotted some of the investment vehicles available on the chart above and have also thrown in Silver Wheaton as it was the outright winner when we performed a similar exercise over at over a six year period. The first observation that sticks out like dogs balls is that Silver Wheaton (SLW) has outperformed both gold and the gold producers by a long way and the gold producers have not.

The other point to note is that the leverage of the producers to gold and silver, which was evident when the bull market began in 2001 has now diminished considerably. This lack of leverage calls into question the use of gold stocks as an investment vehicle.

If we now fast forward and take a look at the chart below covering the past year, we can see that SLW has still outperformed gold itself and the other asset classes once again. Also note that the gold producers have been unable to keep up with gold prices suggesting that investors don’t want to expose themselves to the risks that come with mining.

SLW Compared with Gold Chart 14 August 2010.JPG

So far, the obvious move would appear to be that we avoid the stocks and redeploy our cash into the metal itself and SLW as it has performed incredibly well.

Many of our peers are calling for the precious metals stocks to rally and perform like gladiators and we agree that they should head to higher ground. However, we want the best bang for our buck not merely an improvement on our account statement.

The ignition for these stocks is a dramatic move in gold prices. So we can profit from holding the metal itself and hopefully from holding the stocks. In choosing stocks we are now leaning to being overweight on SLW and reducing our exposure to the producers. Going forward SLW has the price of silver pegged at around $4.04/oz with the overall cost running at around $8.00/oz, as it is a silver streaming company and not a miner. So any improvement in gold prices will have a knock on effect on silver prices and have an immediate impact on their bottom line.

On the other hand the miners do not have such a luxury and are subject to rising costs such as the price of oil, labour, taxes (note the recent proposed 40% tax by the Australia) political change, transport costs, management issues, etc. The list goes on and on with any one of these reasons having the potential to hit their bottom line and at times can be a show stopper.

In conclusion we are now doubting the wisdom of investing gold and silver producers and are seriously considering avoiding them completely.
Disagree! Good, please tell us why.

Stay on your toes these are treacherous waters and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more. have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.

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Reader Comments (13)

The Gold bull market does not come because there is something good happening about Gold. This market will activate due to a breakdown in the traditional finance markets worldwide. Breakdowns can mean sudden crashes, bank holidays, acts of God, unrest, anything. Such events (barring the first one) as you will see will not appear on trading screens. They will appear as trading holidays. The resumption of trading will create a huge buying curve for these stocks when that time comes. Gold market investments are the wild card when everything else fails. Right now we are doing okay since the markets are functional and are behaving technically correctly. I think paring exposure would be okay if one wanted to do trading, however think about the black swan happening you are out of gold and silver.

August 16, 2010 | Unregistered CommenterNaresh

Good analysis - food for thought. What you said about PM Producers
Good analysis, and it seems to cover most of the basis, & you did use the term "INVESTING GOLD AND SILVER PRODUCERS" as opposed to trading & speculating. We need to remember that Miners/Producers should own the metal, both actual & inferred, and we investors become minor (pardon the pun) partners for what it is worth. Having said that, nonetheless, we MUST safeguard our invesment, which leaves me in a quandry. What I would like to have, and I guess it is presuming too much, is a list of ten firms that your team would buy for themselves that would include two producers/miners and the balance stocks like SLW. Would you accept the challenge without recourse or responsibility for the choices?

August 16, 2010 | Unregistered CommenterJohn Ell

Nothing happens when I click here to find out about your options service

August 16, 2010 | Unregistered CommenterJohn Kozon

HRG having great day after 2Q results, We would love too hear your thoughts team

August 16, 2010 | Unregistered CommenterVincent Brenneman

Gold Prices - please excuse the misspelling and broken sentences in my earlier post. My IPhone got in the way, sorry.

August 16, 2010 | Unregistered CommenterJohn Ell


Just to clarify that we are not out of this market, we are making changes as we have said and are becoming overweight with SLW with some cash being made available for either short term or options trading. As you know we are not the sort of site that recommends having 5%, 10% or 15% invested in this arena. We are totally committed to metals and don't own any other stocks.

August 16, 2010 | Unregistered CommenterGold Prices

John Kozon,

The links worked when we tried them, but I have asked the options team to contact you directly so that you can take it from there.

Did the money back offer grab your interest its on one of the articles and runs along these lines:

In fact we are so confident if you sign up to a 12 month OptionTrader subscription before September 1st 2010, we will refund your $179 fee if gold prices do not make a new all time high in 2010! Visit to sign up now.

August 16, 2010 | Unregistered CommenterGold Prices


We will re-visit HRG shortly, at the moment we are holding and have not sold any of HRGs stocks. A nice move up today of 11.69%, hope it keeps going.

August 16, 2010 | Unregistered CommenterGold Prices


An iPhone – thats posh eh!

Your request as follows:

“What I would like to have, and I guess it is presuming too much, is a list of ten firms that your team would buy for themselves”

As a team we are currently struggling to justify stocks vs the metals or a vehicle like SLW. Some of our team want to ditch stocks completely on the basis that we want exposure to gold and silver, the metal, stocks are a vehicle that was s'pose to give us leverage in return for the risks that we were taking with our cash. That leverage is taking a vacation at the moment.

You mention buying for ourselves, we are not buying any of them at the moment for reasons that we have covered and therefore our actions reflect what we think.

We have retained some producers and reduced our holdings in others while upping our stake in SLW.

We will track the progress of all of them and should things change then our strategy will evolve with the changes.

We cant give you a list as we would feel that we are misleading you by pointing you towards something that we wouldn't touch.

We know this tough but thats our stance at the moment.

August 16, 2010 | Unregistered CommenterGold Prices


I've been a SLW follower since before it was created from GG. My only concern in the 6 yr. chart is the big drop in '08 and can't fully see that as an association with the last quarter market crash. Now, since it's recovery, we can see a similar angle of ascent in the current up trend. Do we have reasons for concerns?

August 16, 2010 | Unregistered CommenterM


Its a hard call, if the general markets get hammered then investors who are leveraged up to their lugs will sell anything that has a bid, the fundamentals wont matter one jot. We are of the opinion that there will be a sell off but we don't how bad it will be. Assuming that both gold and silver remain steady then the recovery in this sector should be a quick one, but it is a million dollar question and we all need to protect ourselves as we see fit. Unlike clothes, one strategy does not fit all sizes!

August 16, 2010 | Unregistered CommenterGold Prices

The problem with this analysis is that it is too general. I agree that SLW has performed better than the HUI but it hasn't performed better than all the stocks which make up the HUI. See RBI for instance. Since the middle of 2005, which is as far back as I can track SLW, RBI has blown right by and another of my favourites, ELD, is right up there with SLW. I'm sticking with the stock I have because I'm outperforming the metal by a comfortable margin.

August 17, 2010 | Unregistered CommenterPaul D


If you have a couple of stocks that are outperforming the index then good for you and thanks for alerting our readers to them also. Well done.

August 17, 2010 | Unregistered CommenterGold Prices

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