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Why would one invest in gold mining stocks?

SK Options Trading has long held the view that gold mining stocks are a poor tool to use as leverage, or even to access, the gold market. We do not wish to undermine the gold mining industry; but our research shows that gold mining stocks are inept in terms of benefiting from an increase in gold prices. In this article we will show you how the gold mining sector under-performs relative to not just gold prices, but also to other sectors within the stock market; and it is therefore questionable to hold them in one’s portfolio.

We have used the Sector SPDR ETFs to measure the changes in major stock market sectors and compare them against compared against gold data, and the data from the Gold Miners ETF, GDX, and the Junior Gold Miners ETF, GDXJ.

As the graph above shows, gold has performed better than any other sector, rising 48.78%. Whereas gold stocks have not only underperformed, with junior mining stocks rising only 2.54%, but gold mining stocks are in fact the only sector to lose money, being down 3.65%. Gold mining stocks, which many have expected to outperform gold, are the worst performing stock sector, and have somehow managed to fall in a time period when gold has risen nearly 50%.

This makes gold mining stocks, the worst performing stock sector.

Junior mining stocks have not fared much better, rising only 2.54%. Making it the second worst performing stock sector

This raises the question, why would one invest in gold mining stocks? They do not perform as well as gold, and do not even perform well relative to other stocks, and in fact, would have lost you money.

Investment in gold mining stocks then appears foolish, as one takes on the extra downside risk associated with a mining company. The risks associated with the business of mining include the possible closures of a mine, a change in management, poor operating results, political uncertainty, geographical problems, transportation, rising energy and labor costs, the lack of capital, skill shortages, etc, all of which may result in the value of a stock being reduced.

Investors in gold stocks are taking all this extra risk for no additional reward.

In our modern financial world gaining exposure to gold prices has never been easier; one can purchase the physical metal or hold an ETF such as GLD that tracks the price of gold. This being the case one does not have to purchase gold mining stocks to gain exposure to gold.

If an investor wishes to access the gold market and also get leverage, as it was once only possible to do with gold stocks, then they can now purchase futures, options, or leveraged ETFs such as DGP (a double leveraged ETF on gold). The use of futures allows one to have increased leverage however this comes with increased downside risk.

We regard options as one of the best ways to access the gold market; they provide leverage to the underlying asset and the downside risk can be strictly limited to prevent large losses.

Before the advent of fiat currency in the world, gold was treated as the ultimate currency. In fact many gold bulls and owners of gold stocks regard gold as the most superior currency. So we will now look at how gold stocks perform in terms of the ultimate currency.

We have used gold as a currency to measure the change in prices of various stock market sectors. This is calculated by taking the closing price of gold and the closing price of an ETF, and measuring the cost in ounces of gold to purchase that particular ETF. This shows gold stocks priced in terms of gold instead of US dollars.

Using this method, we show that gold stocks have performed poorly not only relative to other stocks, but also poorly in terms of gold.

The gold mining stocks are down 35.24% in terms of gold, and junior mining stocks are down 31.08% in terms of gold. Again, they are the worst performing stock market sectors.


As the graph above shows, in terms of gold prices, gold mining stocks are the worst performing stock market sector.

Thus gold mining stocks offer poor performance even in terms of gold, and represent a poor vehicle with which to access gold profitably.

Therefore using gold mining stocks to gain exposure to gold prices is a questionable method of trading or investing in this bull market. It is also apparent that even holding gold mining stocks as a simple part of a stock portfolio, would not be an optimal strategy, as gold stocks are the worst performing sectors compared to the market sectors that we have used for today's exercise. To access gold, one can use GLD which tracks the gold price to provide similar returns to gold. If one wishes to gain leverage against the movements in the gold price, options or futures can be utilized. While futures allow increased leverage, it should be noted that this exposure also carries an increased downside risk. However, the use of options allows one to create the desired leverage whilst limiting downside risk; this is why options are our chosen tool to trade on gold prices.

Thus the use of gold stocks to access or leverage the gold market, or even to perform as a stock, is a flawed relative to other vehicles. There is therefore no excuse for holding gold stocks as a part of one’s portfolio given their under performance and in fact negative performance, increased risk, and poor reaction to gold itself. We choose to use options with good risk reward dynamics to provide our subscribers with exposure to the gold market. This allows downside risk to be limited to the price paid for the option, with the exact leverage that we wish to have to best take advantage of the gold market.

Our use of options has allowed our subscribers to take advantage of rising gold prices, and avoid falling gold stock prices. We currently have a trade recommendation open based on gold stocks under performing gold, which is in profit at current mark to market levels. Sign up now to find out the details of this trade so that you too can take advantage of rising gold and falling gold stock prices.

Through this use of options, our model portfolio is up 445.53%, with an average return of 36.17% per trade in an average of 50.19 days. In 2011 our careful and calculated use of options meant that we outperformed gold by 31.03%, and outperformed the gold mining stock index, the HUI, by 52.95%. Our average trade return’s 36.17%, so if you had invested $1500 in to our average trade, it would have easily paid for your 6 month subscription. You could have all of this, for the low cost of just $2.19 a day.

So do not wait around; sign up now!

Regarding In 2011 we outperformed

Gold by 31%,

Silver by 41%,

S&P by 42%

HUI by 53%.

Our model portfolio is up 445.53% since inception

A success rate of 90.72%

An annualized return of 91.38%

Average return per trade of 36.17%

97 completed trades, 88 closed at a profit

Also many thanks to those of you who have already joined us and for the very kind words that you sent us regarding the service so far, we hope that we can continue to put a smile on your faces.

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  

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Reader Comments (1)

"97 completed trades, 88 closed at a profit" this is amazing, is a pro company.

Nice article, thanks for posting!

May 19, 2012 | Unregistered CommenterJohn

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