Over the past five years, two important dynamics have defined the gold market.
1. Gold bullion prices (using SPDR Gold Trust GLD as a proxy) have risen about 160%.
2. Gold stocks (using Market Vectors ETF Trust GDX have only risen about 40%.
Many analysts point to this diversion and argue that gold companies are seriously undervalued relative to the asset they mine and market. However, a shift in investor demand has changed the relationship between gold bullion and gold stocks.
Since 2007, worry over the stability of the global monetary system has risen. As a result, more investors desire gold assets that strip out the equity risk premium. Many gold investors aren't looking for exposure to asset discoveries, manager skill, reserves growth, contractual obligations, etc. They simply desire exposure to an asset that potentially hedges some exposure to the financial system. As a result, many investors looking at gold are simply looking at bullion.
Moreover, with the November 2004 introduction of SPDR Gold Trust, and many similar gold bullion ETFs since then, investors have had increasingly easier access to bullion investing. Prior to the introduction of gold bullion ETFs, bullion was primarily purchased through dealers - a channel that was too illiquid and inconvenient for many investors. As a proxy for bullion, many investors simply bought gold equities. With easier access to the real thing, the need for a proxy is now eliminated and many suggest that buyer demand has moved from gold equities to gold ETFs.
Another problem potentially worsening the divergence between gold equities and gold bullion is that dividend policies have not reflected rising gold prices. This is important because many investors would buy gold equities as a way to gain exposure to below-ground gold reserves, viewing gold companies effectively as an arbitrage-fund-of-bullion that spits off a cash flow (I say 'arbitrage' because the 'fund' acquires the bullion in some cases for roughly $500/oz).
I believe there is even a distinct place for gold companies that fully amortize their gold reserves while liquidating assets and returning cash to their owners (perhaps this 'place' is somewhere between explorers hunting for a home run, majors praying to replace depleting reserves and bullion which collects dust).
The average dividend yield for all gold equities traded on NASDAQ, AMEX and NYSE is about 0.59%. Even when isolating the dividend payers, yields are low - of gold equities with a dividend, the average yield is merely 1.9%.
The payout ratios for most of these gold equity dividend payers are under 30%. Instead of returning cash to investors, many gold companies have retained earnings to re-invest in exploration. This effectively "doubles-down" the bet on management to perform the improbable, providing investors looking for exposure to the precious metal with another reason to shift toward the hard asset. (This is especially troubling if "peak gold" means the best discoveries are behind us.)
It does appear that some gold companies are starting to "get it." Below are the six gold companies that pay a 2%+ dividend. What happens to these dividends in the future is anyone's guess, but this short-list provides gold investors an alternate view of the universe of choices.
Moreover, I suspect if investors vote with their dollars by directing funds to dividend paying gold equities more gold companies would understand that a class of investor sees value in a gold asset that generates cashflow. If more gold companies initiated dividends and/or increased their payout ratios I believe the divergence between gold stocks and gold bullion would narrow.
|(GFI)||Gold Fields Ltd.||3.04%|
|(AU)||AngloGold Ashanti Ltd.||2.58%|
|(NSU)||Nevsun Resources Ltd.||2.58%|
|(GORO)||Gold Resource Corp||2.52%|
|(NEM)||Newmont Mining Corp.||2.46%|
|(AEM)||Agnico-Eagle Mines Ltd.||2.20%|
Disclaimer: Data Source: Google Finance, Finviz. This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.