Gold has been a profitable investment over the past decade but there is a big difference between physical gold and other gold derivatives such as gold stocks and ETFâs among other. Physical gold has been a far better investment than gold equities.
As a hedge against inflation, insolvent banks, and a turbulent stock market, gold is far more suitable than gold equities for the average investor. Gold has offered stability and positive year over year return for over a decade, while equities have been lagging behind. The chart below compares different gold products such as GLD, CEF, GDX, HUI and physical gold.
Gold equities have been lagging behind for the past four years. There are many explanations behind this, some say that new investment instruments such as GLD are competing for capital while others believe that people have been flocking to gold as a fear trade.
There are many theories of why the shares are lagging behind; some think that investors prefer the safety and stability of gold bullion, and others say that gold derivatives and ETFs has been competing with the shares for capital. But perhaps the most overlooked reason for the poor performance is that mining is a tough business. It is labor intensive, capital intensive with a lot of regulations. And, there is no guarantee that a mine will be profitable even after capital has been spent for development.
This is one of the reasons why most gold mining companies are poor investments. But on the flip side this also why a company that actually makes a real discovery can go up X10 or x100 times. And a well timed speculation in one of these companies can generate a sizable gain over a relatively short time span.
Gold stocks are currently at a multiyear low against gold bullion. As a result investors and speculators in this line of business may want to consider allocating a portion of their speculative capital into gold stocks. There is of course no guarantee that it will work out, but prices are low and there is the potential for a violent rally to the upside if this sector turns around.
To learn about trends and spot the next investment opportunity read the Casey Report from Casey Research. It's a monthly investment news letter that breakdown economic trends in a way that is easy to understand. They make recommendations based on economic reality and their track record is several times better than the market or any mutual fund for that matter.