Different investors prefer to invest in different products for a multitude of reasons and end goals. A vast range of equities, currencies, bonds and commodities can now all be traded from the click of a mouse anywhere in the world. Although not our predominant focus, equities have several pros and cons and can lead to significant wealth, especially with the market in the right state. Some traders preach the benefits of gold mining stocks as a way to benefit from rising gold prices - a view we strongly disagree with.
Equity investors have virtually unlimited combinations of companies, countries and industries they can gain exposure to. The easiest option for such an investor is buying into the S&P 500, which tracks the value of the 500 most valuable publicly traded American firms. This allows exposure to numerous industries, has diversification benefits and is a very common play.
Alternatively, one could narrow their horizon and try to pick individual industries that they foresee outperforming the S&P 500 as a whole. There are a range of ETFs that track specific industries, some of whose performance over the past 12 months we've plotted below:
Most have performed very well over this time. XLK (technology sector index) being the standout, up 34.4% in a year. There is one very clear underperformer though, which our frequent readers will be familiar with from our past postings. That industry tracker is HUI, the gold miners index (GDX). Not only has HUI underperformed all the other equity sectors (the worst of which is still up 14.83%), it has lost 23.07% of its value in just 12 months which amazingly is actually an improvement on the 40% it was down in mid-May.
Even more amazing, this weak performance from HUI has come as gold approaches last year's all-time high. If you can't make money in these stocks with the price of gold high, when can you?
We have been pounding the anti-mining stock drum for many years now, as far back as 2008. (See our article from 2011 further explaining our preference to avoid them: Are Gold Stocks the Real Barbarous Relic?) If mining stocks are to turn their fortune around, surely four and a half years was a long enough time frame to see it happen. Looking back to 2008:
Once again over this time frame the miners are down. On the upside this time they've outperformed a sector - XLF! Maybe we owe the miners an apology, but first consider the industry XLF tracks. That industry is financial service firms, who as we all know haven't done so well as of in recent years due to the financial crisis, so we'll withhold that apology for now.
Going back two years financial services have done better than the gold miners once again. BUT, at least the miners are in the positives, up a massive 0.35%.
Why we stay well away from gold mining stocks is abundantly clear.
Some commentators prefer to be more selective in picking stocks from the larger HUI index, akin to picking a specific industry ETF over the broader S&P 500 index. A very common choice is the "junior" miners index, which tracks smaller less advanced companies that theoretically have more upside potential in their earnings. GDXJ is the symbol for that index. How does it compare?
Plotted in black above, it's clear to see the juniors do considerably worse than the mining sector at large.
Often cited as the reason to buy gold stocks is the supposed increased leverage to the gold price they allow. This is simply not the case as we covered in our recent article Gold Stocks Vs Options. Gold stocks do not accurately or reliably track the price of gold in direction or magnitude, sometimes going in the opposite direction. Options, on the other hand, allow for near perfect exposure to the gold price, high leverage if one chooses along with other benefits including:
- · Flexible timing, one can speculate on the gold price next week or in two years or more
- · Downside is known and limited
- · Speculating on increasing, decreasing, or unchanged prices is achievable
- · Upside is unlimited, with huge returns in short time frames easily achievable
- · Customizable leverage
Our preference between mining stocks and options is clear, and unlike the miners our past return is not only positive, but very high. What would you trust more to generate a return?
If someone wants exposure to gold our advice would be to buy gold. If they want to increase their exposure with higher leverage, options are a great tool.
If someone wants exposure to equities, buy into the S&P 500.
Trying to combine the best of gold and equities by buying mining stocks is a flawed, poorly considered and most likely a doomed-to-fail strategy.
Finally, what has performed better than mining stocks and equities?
No prizes for guessing gold (green line) is the clear winner, not mining stocks.
Best of luck with your trading.
Additional disclosure: I am long GLD via options.