Canadian Investor Frank Giustra Rotating Out Of Gold ETFs And Into Miners

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 |  Includes: GDX, GLD
by: Mark Yagalla

Famed Canadian mining investor Frank Giustra says the bull run in gold is not over. He told The Globe And Mail that if it is, he will sing Patsy Cline's "So Wrong" wearing ladies' underwear in the middle of Vancouver. His reasoning like so many others is that nothing has fundamentally changed in the gold market. Central banks around the world are still embarking on quantitative easing and printing money. Inflation is bound to kick in. As long as the fundamental picture remains intact, I view the recent pullback in gold as a technical correction and agree with Giustra's thinking. He further states that gold miners offer more value than gold.

Who Is Frank Giustra?

Frank Giustra is the former Chairman, President & CEO of Yorkton Securities. He has been financing the mining sector since the 1980s. After he left Yorkton, he went on to create a large fortune in several oil, gold, copper and uranium mining firms. Giustra is also the founder of Lions Gate Entertainment (NYSE:LGF) and served as chairman from 1997 to 2003. In February 2007 Uranium One (OTC:SXRZF) agreed to acquire UrAsia for $3.1 billion. Giustra was a major shareholder and director in UrAsia. Two years prior, the stock was trading at 10 cents a share that Uranium One was paying $7.05 a share for.

From 2001 to 2007, as the gold bull run was just starting, Giustra was Chairman of Endeavour Financial (OTC:ENDEF) which launched several mining ventures. Among them were Wheaton River Minerals, which was acquired by Goldcorp (NYSE:GG); Silver Wheaton (NYSE:SLW); Gold Wheaton, which was acquired by Franco Nevada (NYSE:FNV); Northern Orion, which was acquired by Yamana Gold (NYSE:AUY); and Pacific Rubiales Energy (OTCPK:PEGFF).

To understand how insightful Frank Giustra is, take a look at this editorial he wrote back in 2002, before the gold bull market began. Some of the highlights that make the case for gold are:

However, the most important dynamic affecting the gold price is, and will be, the fate of the U.S. dollar. The dynamics noted above will, for the most part, play but a supporting role to that of gold's inherent inverse relationship to the dollar.

The first pillar is that of supply. Like any commodity, it stands to reason that the more dollars created, the less valuable they become. Therefore - in overly simplistic terms - when money grows more rapidly than the economy backing it for a prolonged period, it is logical that the value of the currency will be worth less.

For his part, in a desperate attempt to maintain the illusion of wealth and with the equity markets in such disarray, the consumer's attention has now turned to the housing market as a source of spending money. With the increase in home values overshooting any kind of business or income growth, the writing is already on the wall. What will the consumer junkie hock next when this game ends?

That said, it may seem surprising with all these negative forces stacking up against the dollar, that it hasn't fallen more quickly. That is partially because currency values are relative, and the alternative currencies against which the dollar is measured are not that attractive either.

The yen can hardly be considered safe, given that Japan's economy, stock market, bank system and credit rating have been in a decade-long meltdown. As for the "Rodney Dangerfield of currencies," the euro, it represents a number of economies plagued not only by sluggish growth but also by rigid regulatory structures and monetary/fiscal control mechanisms that will do more to impede growth than encourage it. In addition, if you think the U.S. equity markets have been a disaster, consider the dismal performance of their European counterparts. The U.S. dollar is most likely getting some of the benefit, as both U.S. and foreign shareholders bail out of European stocks and invest in the U.S.

The dollar's reserve status is clearly the most important reason for its continued strength. At last count, the dollar represented a whopping 76% of global central bank reserves, while gold reserves are at levels not seen for 50 years. Although the tide has turned on the dollar, the fact that these holdings are so pervasive means this devaluation process may play out over a long period of time. Since the dollar's dominance was achieved largely at the expense of gold's status, it will be gold that eventually benefits from the dollar's fall.

Imagine yourself as a foreign central banker today. You may have looked intelligent during the past decade, selling or otherwise pledging your non-yielding gold reserves and using the sale proceeds to invest in high-yielding U.S. Treasuries. How smart might you look now in the face of a rising gold price, a declining dollar and yields plunging to negative real rates of return?

Consider, also, the increasing rhetoric by a number of Asian central bankers and politicians, promoting a view of less reliance on the dollar and more on euros and gold as either reserves or transaction currencies. Even a small diversification away from the dollar as the settlement currency in Asian-block intra-trading would remove several hundred billion in dollar-demand.

My takeaways from this piece that was written back in 2002 are as follows:

  • Gold does indeed have an inverse relationship with the U.S. dollar.

  • Giustra said consumers would rush into housing. This was 5 years before the U.S. Housing market collapsed.

  • The U.S. dollar is strong because other currencies aren't that attractive.

  • The U.S. has benefited from capital flight from Europe and Japan.

  • Gold will benefit from central bank purchases as gold holdings increase and central banks move away from the U.S. dollar.

Next Move For Investors

In The Globe And Mail interview, Giustra says:

For the first time in almost 10 years I'm seeing a disparity in the price of gold and gold-mining companies that I'm starting to think of doing the switch from ETFs back into certain gold miners.

Now Giustra is telling investors to cycle out of their gold ETFs and into mining stocks. That the miners now offer more value. In doing so, let's compare the SPDR Gold Shares (NYSEARCA:GLD) and the Market Vectors Gold Miners ETF (NYSEARCA:GDX).

SPDR Gold Shares

  • Year to Date Return: -4.66%
  • 1-Year Total Return: -4.72%
  • 3-Year Total Return: 12.34%

Market Vectors Gold Miners ETF

  • Year to Date Return: -18.41%
  • 1-Year Total Return: -22.82%
  • 3-Year Total Return: -4.57%

In breaking down the GDX we see that it offers a 1.2% yield. The top 10 holdings include Barrick Gold Corporation (NYSE:ABX), Goldcorp, Newmont Mining (NYSE:NEM), Silver Wheaton, Yamana Gold, AngloGold Ashanti (NYSE:AU), Kinross Gold (NYSE:KGC), Randgold Resources (NASDAQ:GOLD), Agnico-Eagle Mines (NYSE:AEM), and Eldorado Gold (NYSE:EGO). The average P/E in the GDX is 10.68 and the average price/book is 1.2.

Assessment

I agree with Frank Giustra. History has shown he knows the mining sector and has been one of the few who's been able to time the market in the past. He has said he thought the miners were cheap 2 years ago, and they are even cheaper today. There's value in the mining stocks as they are cash generators and pay dividends. I think there's more upside potential in the GDX over the GLD if Giustra is right and the bull market in gold is not dead. If the bull market in gold is dead, we all may be joining Giustra in wearing ladies underwear and singing Patsy Cline's "So Wrong"!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.