All that glitters is not gold is a well known saying which means that not everything that looks precious is precious. In this article we are taking this concept one step further showing that not everything tied to the gold metal/markets is a winner. In fact there are many stocks and equities, related to the gold markets that just did not perform well during one of the greatest gold bull markets ever. But before we jump into that let's review the basics of the metal.
Gold Basics
Gold has actually always been most interesting to me. It is one of the few commodities that's real purpose is to store wealth. It's a soft, heavy metal of limited value in the industrial side of manufacturing. Yet it has been with us for thousands of years where its purpose has little changed. That purpose, the storage of wealth and power, remains to this day and has become more important than ever. With prospects of high inflation, crushing governmental debt, political turmoil and outright fear the actual metal has been one of the best investments over the last couple years. The way many investors have played this market is by buying SPDR Gold shares (GLD) which attempts to mimic the actual price of gold itself. The return on GLD since 12/31/2008 has been roughly 73%. See the below charts below for the performance.
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But what about the gold mining companies? The basis of this article though is to show that just because an entity had exposure to gold in their business dealings does not automatically mean they were as successful as investing in the metal itself. Quite the contrary, many companies outright failed to execute their business plan even though they happened to be caught up in one of the largest gold bull markets. To examine this we will use the Market Vectors Gold Miners ETF (GDX) as a benchmark. This ETF is widely traded and seeks to replicate as closely as possible the NYSE Arca Gold Miners Index. The fund normally invests at least 80% of its total assets in common stocks and American depositary receipts of companies involved in the gold mining industry. For the same period of time (12/31/2008 – present), an investment of $100,000 would be worth $168,270 (which includes dividends). This is a 68% return on the initial investment. This is roughly 5% lower than if one invested in GLD, but it is still well within the ballpark of what is acceptable in comparison.
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Detailed below are the holdings of the ETF, but to make it more interesting I added a column called "Current Value." This amount is the total dollar value that the individual stock made if one would have invested $100,000 on 12/30/2008. Please note that this amount also includes any dividend generated by the company.
All Fund Holdings as of 06/02/2011 if Invested $100K on 12/31/08 in each | |||
Holding | Ticker | Current Value | % Return |
Barrick Gold | $126,942 | 26.94% | |
Goldcorp Inc | $156,982 | 56.98% | |
Newmont Mining | $149,328 | 49.33% | |
Kinross Gold | $87,353 | -12.65% | |
Anglogold Ashanti | $165,118 | 65.12% | |
Yamana Gold Inc | $164,956 | 64.96% | |
Iamgold | $338,142 | 238.14% | |
Silver Wheaton | $541,899 | 441.90% | |
Cia De Minas Buenaventura Sa | $214,153 | 114.15% | |
Agnico-Eagle Mines | $127,847 | 27.85% | |
Eldorado Gold | $187,539 | 87.54% | |
Randgold Resources | $185,120 | 85.12% | |
Gold Fields | $163,637 | 63.64% | |
Harmony Gold | $129,596 | 29.60% | |
New Gold | $679,719 | 579.72% | |
Pan American Silver | $189,992 | 89.99% | |
Royal Gold Inc | $123,444 | 23.44% | |
Coeur D'Alene Mines | $287,850 | 187.85% | |
Silver Standard Resources | $176,174 | 76.17% | |
Hecla Mining | $282,141 | 182.14% | |
Gammon Gold | $179,529 | 79.53% | |
Nevsun Resources | $859,723 | 759.72% | |
Seabridge Gold | $215,472 | 115.47% | |
Minefinders | $248,149 | 148.15% | |
Aurizon Mines | $170,061 | 70.06% | |
Great Basin Gold | $157,813 | 57.81% | |
Northgate Minerals | $343,374 | 243.37% | |
Golden Star Resources | $260,000 | 160.00% | |
Tanzanian Royalty Exploration | TRE | $166,350 | 66.35% |
Vista Gold | $251,787 | 151.79% | |
As one can see, all but one of the holdings (KGC) made gains for the fund. But now look closer at the percent gains and remember the 73% return for GLD or the 68% return for GDX. Ten of the 30 holdings performed below these return rates. Some actually performed substantially below the rates (see below).
All Fund Holdings as of 06/02/2011 if Invested $100K on 12/31/08 | |||
Holding | Ticker | Current Value | % Return |
Barrick Gold | ABX | $126,942 | 26.94% |
Kinross Gold | KGC | $87,353 | -12.65% |
Agnico-Eagle Mines | AEM | $127,847 | 27.85% |
Harmony Gold | HMY | $129,596 | 29.60% |
Royal Gold Inc | RGLD | $123,444 | 23.44% |
Now a return in the mid 20% range for a 2.5 year time frame on the surface looks to be great, but when compared to the averages it falls well short. Basically it means that the investor in these individual companies left lots of money on the table.
What is even harder to believe is that there were actually companies (some not on GDX) involved with the gold trade that would have actually lost investors money during one of the strongest bull markets ever seen. These companies are:
DRDGOLD: Is a mid-tier, unhedged gold producer and the fourth largest gold company in South Africa. Increasingly, its focus is on the recovery of lower-risk, lower-cost, higher-margin ounces. At present, 68% of production comes from surface retreatment operations.
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Kinross Gold Corporation: This company, together with its subsidiaries, engages in mining and processing gold ores. It also involves in the exploration and acquisition of gold bearing properties. The company's gold production and exploration activities are carried out principally in the Americas, Africa and the Russian Federation.
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Jaguar Mining: Jaguar Mining is a gold producer in Brazil with operations in a prolific greenstone belt in the state of Minas Gerais. Jaguar is also engaged in developing the Gurupi Project in the state of Maranhão. The company is actively exploring and developing additional mineral resources at its approximate 256,300-hectare land base in Brazil.
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In conclusion, it is easy to see that the gold trade has been very successful the past few years. Except for the above mentioned names, (DROOY, KGC, JAG) one could almost have randomly picked a gold mining/exploration company and have make money. The main goal for any investor though is to maximize profits. The best, easiest investment would have to been to just invest in the metal itself via the ETF. An investment in GDX would have also been a good choice as it generated a great return and provided a bit of diversification within the sector. Investing in the individual companies became much more of a gamble and would really require one to complete in-depth analysis to pick the real winners and try to leave the losers behind. So while the metal does glitter, the companies who mine it might not.
Disclosure: I am long GG, GGN.
