Gold: Focus On The Big Picture And Ignore The Noise

Includes: ABX, GDX, GG, GLD, NEM
by: The Financial Lexicon

Gold (GLD), priced in fiat currencies, has been stuck in the mud for nearly a year. Furthermore, as a collective group, the gold miners are trading well below where they were last July. The Market Vectors Gold Miners ETF, GDX, is down roughly 30% from one year ago. More specifically, the three largest holdings in GDX, Barrick Gold (ABX), Goldcorp (GG), and Newmont Mining (NEM), are down 28.94%, 38.24%, and 20.54% respectively since July 18, 2011. While investments in gold haven't been performing the way some might have expected, I would like to focus on the forest rather than the trees.

Sometimes a picture is worth a thousand words. I am hoping the following six pictures will be worth enough to illustrate why it is that many people are choosing to own gold. The charts below show the price of gold in U.S. dollars, Australian dollars, euros, Canadian dollars, the U.K.'s pound sterling, and the Chinese renminbi.

Gold Price in US Dollars ChartClick to enlarge

Gold Price in US Dollars data by YCharts

Gold Price in Australian Dollar ChartClick to enlarge

Gold Price in Australian Dollar data by YCharts

Gold Price in Euro ChartClick to enlarge

Gold Price in Euro data by YCharts

Gold Price in Canadian Dollar ChartClick to enlarge

Gold Price in Canadian Dollar data by YCharts

Gold Price in UK Pound ChartClick to enlarge

Gold Price in UK Pound data by YCharts

Gold Price in Chinese Renminbi ChartClick to enlarge

Gold Price in Chinese Renminbi data by YCharts

What do these charts have in common? In all six cases, the price of gold, in fiat currency terms, has risen significantly in recent years. I recognize that these six currencies do not serve as the medium of exchange for all the world's people. However, these six currencies are important enough to the international monetary system that their performances relative to gold should not be ignored. Investors are sending the signal that they are losing faith in fiat money and that gold is the place to be to protect against their worst fears coming true: fiat money collapse. Gold served as the protector of wealth during the fiat money collapses of years gone by. Unless this time is different from all the rest, it will once again serve that purpose should today's fiat money dominated world move to a different monetary system in the future.

Although gold's price in fiat currency terms may go through extended periods of unimpressive or even poor performance, such as during the past year, it's important not to become so fixated on short-term fiat price fluctuations that the big picture is forgotten. The big picture, as it pertains to gold, is that gold is a store of value that has an historical role as a wealth protector during times when currencies collapse. If you own gold and believe we are currently living in a period of history during which the risk of a fiat money collapse is very real, focus less on the price of gold in fiat terms and more on the number of ounces of gold that you own.

If you are long the miners, believing they will provide the same type of wealth protection that gold itself will provide, you should strongly reconsider. It should be an eye-opener for investors who want exposure to gold's role as a store of value but do so through equities that the miners have underperformed severely during a time when gold's historical role is once again being recognized world-wide. Below is a chart that illustrates the underperformance of the miners relative to gold in recent years. It shows the price of gold in U.S. dollars versus GDX since GDX began trading on May 22, 2006.

GDX ChartClick to enlarge

GDX data by YCharts

I'm not saying investors interested in gold exposure should avoid the miners altogether. After the shellacking many of the miners suffered over the past year, there is some value to be found. However, keep in mind that at the end of the day, you are investing in a company. The value of a company and the value investors find in that company's stock may differ greatly from the value of the underlying commodity in which that company has an interest. Perhaps more importantly for investors who look to gold for protection against fiat money collapse, an investment in the stocks of gold miners can only be redeemed in today's fiat currency. If that currency goes away, there's no telling how your investment will be valued under a new money system. When I think about exposure to the miners in the context of my overall allocation toward gold, at this time, the miners serve a much smaller role and the miners are the most expendable.

The bottom line: Focus on the big picture when it comes to gold and ignore the noise that is the day-to-day price fluctuations in fiat currency terms. Also, don't lose sight of why it is that you own gold. If you own it as protection against fiat currencies and you still have reason to believe that protection is needed, then focus more on the number of ounces of gold that you own rather than on the price of that gold in fiat currency terms.

Disclosure: I am long NEM.

Additional disclosure: I am also long gold.