Seeking Alpha

Time to Sell Gold; Buy the Producers if You Must

by: Brett Korsgaard

First it was the hardened “gold bugs” who swore by the precious metal through the brutal '80s and '90s when no appreciation was at hand. Then the sophisticated investors started to kick around the concept of owning gold at the onset of the millennium. Figuring that equities valuations were unsustainable (and they were), these investors bought into an asset class that was unloved, inexpensive and with great structural advantages relative to other classes. Gold was $250 an ounce at the beginning of 2001 and this proved to be a brilliant move. At the onset of stock market crash 1.0 (the millennial crash), gold started to really start moving. It effectively decoupled from its decades-long state of torpidity and more than doubled by 2005. At this point, the marketers/advertisers jumped on the bandwagon and print and radio spots began to appear trumpeting the inherent value of gold (they rarely appear until an asset class has doubled and starts to generate consumer interest).

Wall Street got into the act at this juncture as well through the securitization of gold and silver through such exchange traded instruments as SPDR Gold Trust (NYSEARCA:GLD), iShares Gold Trust (NYSEARCA:IAU), iShares Silver Trust (NYSEARCA:SLV) and Central Fund of Canada (NYSEARCA:CEF). This made it even easier for hedge funds, investment professionals and the masses to own the asset class. And buy they did, as the stirrings of a credit bubble began to form in the eyes of an investment community eager for an asset that was coming to be seen as a store of intrinsic value in the face of fiat currencies that might face the specter of being printed to irrelevance at the onset of trouble in the US and the eurozone. Also at this juncture, the economies of the BRIC (Brazil, Russia, India and China) countries began to awaken in earnest and the populations of India and China in particular, with a rising middle class, had the means to purchase what has for centuries been an asset class that could be trusted: Gold.

In the aftermath of the 2008 financial crisis, all asset classes were impaired and gold swooned to a low of just under $700.00 an ounce. But a funny thing happened as the “advanced” western economies – particularly the United States -- flooded the globe with dollars. Equities and precious metals doubled in value and real estate continued to languish as demand and credit evaporated at the onset of super high unemployment rates. Now, with the realization that the west has few arrows in its quiver to deal with its myriad structural imbalances – and can’t easily prop up equities with QE3 (though that might be imminent) -- gold has again unhinged itself to be the asset class and the only emperor that has a stitch of clothing left.

As the proverbial question poses, “Where do we go from here?" I generally avoid the asset class that the masses clamor for, and experience has taught me to be a contrarian. The discussion around gold has become a veritable circus, a riot of epic proportions and the cacophony of the masses clamoring for gold has become shrill at best and manic at worst. In my eyes, the archaic metal is starting to lose its luster as the best investment for the future. Gold at $1800 an ounce still has a ways to go before it reaches its 1980 inflation-adjusted high of $3000.00 an ounce and all the structural reasons for owning gold are still intact: Huge deficits, free flowing printing presses, economic uncertainty. Sure, gold may have room to run, but it has unhinged itself from the very companies that continue to churn it out.

While owning gold outright (or the derivative that controls it) does not have the company risk of a Goldcorp (NYSE:GG) or Barrick (ABX) and the like, these companies hedge against this fact by having proven reserves of the yellow stuff in the ground extractable at average prices of about $500.00 an ounce. That is a store of value in the truest sense of the word. I believe that the masses are stumbling over themselves to buy gold when the far better value is to own the companies that control so much of the supply. I will probably be pilloried for this by the gold bugs, but I’m going to hold my ground: Now is not the time to buy gold and it may be a great time to sell it.

As Warren Buffett stated in 2010 when gold could be had for less:

You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils (NYSE:XOM), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?

I just can’t say it any better than that. The time to buy gold is over. If you still want exposure to gold, the time to sell gold and buy the producers is now. Believe it, there is a ready buyer for your shares of GLD and IAU. Or you can sell the real deal at just under $1800.00/ounce.

Buy the producers instead.

Company Share Price Market Cap Cost to Produce (per ounce) Reserves (ounces)
Barrick Gold (ABX) $49.00 $49 Billion $457.00 138 Million
Goldcorp (GG) $50.00 $40 Billion $443.00 60 Million
Newcrest Mining (OTCPK:NCMGF)
$40.00 $31 Billion $493.00 205 Million
Newmont Mining (NYSE:NEM) $58.00 $28 Billion $485.00 142 Million
Kinross Gold (NYSE:KGC) $15.00 $17 Billion $508.00 92 Million
AngloGold Ashanti (NYSE:AU) $45.00 $17 Billion $638.00 264 Million
Yamana Gold (NYSE:AUY) $15.00 $11 Billion $442.00 19 Million

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.