This year’s turnaround in Gold Mining shares had helped to buoy the hopes and dreams of investors who were ‘betting’ that their long, agonizing wait for euphoric, exponential gains is over. They continue to believe that the future for the Gold Mining Industry is quite rosy. Unfortunately, they are probably wrong.
Most longer term investors in Gold Mining shares are not betting on the mining industry as much as they are betting on gold itself. They have invested in gold mining shares for several reasons:
- They are, for most investors, more convenient than dealing in the physical metal. Just call your broker; or buy them in your online account.
- They are seen as being a ‘proxy’ for gold itself.
- Some expect the mining shares to appreciate in value considerably more than the physical metal (fixed mining and production costs coupled with ever higher gold prices leads to ‘leveraged’ earnings and profitability). There is some justification for this, but it normally occurs in the early stages of a sustained increase in US dollar prices for gold and is short-lived.
Wall Street doesn’t like gold. Financial advisors are in the business of managing money. So in order to satisfy the demand for gold-related investment vehicles, it has given us a plethora of stocks, mutual funds, ETFs, and other paper substitutes and products that supposedly represent the real thing. Your broker or financial planner can easily incorporate these types of investments into your asset allocation model without too much trouble. It boils down to marketing. It’s all about money under management. Your broker or financial planner isn’t going to tell you to buy gold coins with 10-20 percent of your assets and take delivery of them. But he or she might tell you to put some of your dollars into a gold-related mutual fund or ETF.
Let’s assume that all of the reasons above are valid and justify an investment in gold mining shares. At current prices, gold mining shares are approximately eighty percent higher than they were in 1998/99. And as recently as January of this year they were actually at or below their price levels of 1998/99. For comparison, US stocks at current prices are about two hundred fifty percent higher than their levels of 1998/99. And lets not forget about gold itself. Since 1998/99, gold is up over four hundred percent!
The above results are net of all the volatility that we have experienced in the financial markets over the last seventeen years. This includes the technology stock craze and crash, the September 11, 2001 terrorist attacks and subsequent general stock market decline. It also includes the real estate and stock market crashes 2008/09, US Treasury debt downgrade 2011, etc. And, even the ‘surprise’ results from the recent US election for President.
So what have we learned about gold mining shares over the last seventeen years? Gold mining shares are not even remotely close to keeping pace with the yellow metal itself, let alone providing the ‘leveraged’ profits that many investors were counting on. Gold mining shares are a lousy investment. They are not a ‘proxy’ for gold. Holding physical gold itself has been five times more profitable than owning a diversified portfolio of mining shares.
An investment in gold mining shares is an investment in a highly speculative, under capitalized business operation which is affected by too many variables other than just gold.
Are there reasons for owning gold mining shares? Possibly. They can provide diversification in an asset allocation model. And if you are a trader, (speculatively inclined) there have been a ‘few’ shorter periods of time when the more speculative and explosive nature of ‘herd mentality’ has lead to huge gains in mining shares. But be very quick to take profits and reallocate the proceeds. The volatility can be overwhelming.
If you don’t own physical gold, you don’t own real money. Gold is real money.