Speculating to victory: Bullion, Miners or Streamers?
No question gold exemplifies the definition of a speculative investment. I traded in and out of this market for over 3 years and experienced the serious volatility.
Several options exist for investors to play the gold market: physical bullion (you can hold in your hand), closed-end funds (such as Central Gold trust, Central fund of Canada), shares in the the mining companies that pull gold from the ground, and last, the streamers (shares in companies that profit in the buying/selling of bullion, through deals with junior miners to purchase bullion at a fixed price).
If timed correctly, I'm under the impression that miners outweigh all others in the massive gains possible, but timing is the million dollar question, where is the bottom, is now a bottom?
I'm back testing and eventually, aft-casting returns from the various precious metal options to see which provides the average joe investor like me the best opportunity of huge winnings if the trade goes in my favor.
PERFECT TIMING:
Here are gains from the 2008-09 lows to the 2011 peaks (if timed perfectly). Some assumptions -monthly charts, buying or selling on the first or last day only of a peak/bottom month, no one can pick the exact top within each month can they? This also mimics how I plan to buy/sell going forward, typically when I get my monthly chart technical indicator, I go in or out on the first day of the next month.
GTU-UN (Canadian Central Gold Trust):
buy Sep 01, 2008 at 34.40, exit Aug 31, 2011 at 70.31: 104% return
XGD.TO (general miners index):
buy Oct 31, 2008 at 9.32, exit Sept 30, 2011 at 24.49: 162% return
FNV.TO (franco nevada gold streamer):
buy Oct 31, 2008 at 17.27, exit Dec 31, 2012 at 57.51: 233% return, add trace more /year dividend
SSL.TO (Sandstorm gold, smaller streamer), limited history chart only started around fiscal cliff crisis:
buy 2008-05-31 at 2.50, exit Oct 31, 2012 at 13.99: 459% return
SLW.TO (Silver Wheaton, Silver streamer):
buy Nov 30, 2008 at 4.32, exit Apr 30, 2011 at 38.50: 791% return , add trace more /year dividend
As a last comparison, the HUI Gold bugs index, a higher portion of juniors in the basket:
HUI Index
buy Oct 31, 2008 at 194, exit Sept 30, 2011 at 526: 171% return
RISK AND REWARD :
Another important way of analyzing these products is the potential risk, how far did they drop from high to low? I'm sure other investors somewhere have utilized a similar calculation, nothing formal here, let's assume the best case winnings divided by the worst case losses in percentage terms:
GTU-UN (Canadian Central Gold Trust):
70.31 aug 31, 2011 down to 44.25 Dec 31, 2013 = 37% loss
Reward/Risk = 104% / 37% = 2.81
HUI :
526 Sept 30, 2011 down to 198 Dec 31, 2013 = 62% loss
Reward/Risk = 171% / 62% = 2.75
Franco-Nevada:
56.22 on Dec 31, 2012 down to 37.65 June 30, 2013 = 33% loss
Reward / Risk = 233% / 33% = 7 .06
Sandstorm and Silver Wheaton were used above for illustrative purposes about the gains, but I believe it will be difficult for those companies to replicate the share appreciation they experienced going from micro-cap companies to larger companies. Sandstorm is still relatively small, so I would consider a speculative position when the time is right.
SLW.TO:
38.50 April 30, 2011 down to 18.59 June 30, 2013 = 52% loss
Reward / Risk = 791%/ 52% = 15.2
For comparison, price of silver comex:
Gains - 9.73 up to 48.58 = 399%
Losses- 48.58 down to 19.45 = 60%
Reward / Risk = 6.65
Sandstorm Gold:
13.99 Oct 31, 2012 down to 4.59 Dec 31, 2013 = 67% loss
Reward / Risk = 459% / 67% = 6.85
Conclusions:
Gold streamer performance reflects possibly, a more favorable reward/risk balance for a speculative investment when compared with miners or bullion.
Silver bullion and silver wheaton experienced monumental gains magnitudes higher than similar gold products.
Disclosure: I am long CEF.