Gold Miners Stock Outshines Gold

by: Camari Ellis

Gold is all the rage in the media these days. Increasing in value by almost 500% over the last 10 years. The S&P 500 return compared to gold's record is quite meager, returning only 12.83% over the same time period. The gold run is very impressive by anybody's standards.

This meteoric rise in gold's price can be attributed to many factors. Central banks have been purchasing gold for their country's reserves, China is demanding more gold for jewelry and their growing industrial sector, and the fear factor across the globe has investors on edge. Terrorist attacks/scares, wars, sovereign defaults, market crashes, soaring food prices, and last but not least, failed debt ceiling negotiations by the U.S. Congress -- it's amazing that gold has not hit the $2,000 mark!

Historically, gold has been viewed as the ultimate currency; the greatest store of value or means of exchange despite its heavy weight or its inability to pay investors while they hold it (dividends).

The World Gold Council Gold Demand Trends Q1 2011 publication stated “The prospects for Gold Demand in China, the second largest gold consuming market in the world, are compelling both in the short and long term; We believe it could double within the next 10 years”

People love it! Anytime there is a major catastrophe, investors begin to pile in, and since there is a limited supply, price ultimately rises.

Gold has clearly been an impressive investment, but, is buying gold the best way to profit from gold's price appreciation? There are several ways to invest in gold. Jewelry, coins, futures contracts, and ETFs like IAU and GLD give an investor direct access to this precious metal. There are also companies that explore and mine for gold, often referred to as gold miner stocks that can be used to leverage the price of gold. ETFs have leveled the playing field for the average individual investor but have been blamed for this decade long rise in gold prices since they give easy access to investors without the worry of storage and insurance costs. However, investing in gold via ETFs can create tax headaches for many investors due to the IRS treatment of commodities.

There are other ways to benefit from the movement of gold prices instead of buying the physical bars or 24k gold chains. What can be better than gold to capture gold movements? Good old fashion stocks! Gold miners stocks to be precise. After reviewing gold price movements on Bloomberg and, I discovered that many stocks that are highly correlated to gold prices actually have outperformed this shiny metal.

After I reviewed this data I saw that the five highest correlated stock to gold price movements also have outperformed gold over various time frames.

Correlation Table

*Data Provided by Bloomberg LP


1 Year Return 5 Yr Return 10 Yr Return
GOLD SPOT $/OZ 34.27% 156.78% 491.91%
ELDORADO GOLD CORP (NYSE:EGO) 15.39% 322.72% 1087.50%
ROYAL GOLD INC (NASDAQ:RGLD) 50.38% 140.19% 1309.78%
SILVER WHEATON CORP (NYSE:SLW) 111.68% 359.35% 1060.91%
S&P 500 INDEX 25.64% 8.35% 12.83
Click to enlarge

*Data Provided by Bloomberg LP

The Catalyst

Matt Day's article “Headway on Talks Drives Gold Lower” in today's Wall Street Journal reported “President Obama and congressional leaders were close to a deal to lift the U.S. debt ceiling. While the White House later said such an agreement wasn't completed yet, traders viewed the day's developments as reducing the chances of a U.S. default. The Treasury Department has said it won't be able to meet all of its obligations if the borrowing limit isn't increased by Aug. 2.”

Sounds like more confusion to me. With the 2012 presidential elections moving closer, the Republicans are motivated to fight harder for a political victory so they can make a great case for overthrowing the current Democrat president.The threat of impeding downgrades of U.S. debt by the major credit rating agency have not motiavitated the U.S. Congress to act. If the president and both chambers of Congress can not agree on a debt ceiling deal before the August 2nd deadline, it could spell trouble for both equity and bond markets. It is highly likely that gold could continue to rise above the $1,600 level, thus creating a good short term opportunity for the gold miners stocks listed above that have low correlations to the overall equities markets.

Disclosure: I am long IAU, GDX.