Wall Street people learn nothing and forget everything. -Benjamin Graham
Precious Metal?: As far back as we can see, gold has been valued higher than almost any other commodity, or anything for that matter including love! There are many true and fictional stories form varied cultures about how a man or woman chose their greed for gold over their friends and loved ones only to end up alone and miserable...My point here is that humans LOVE gold, whether it's worthy of our love or not, and in good times or bad, it still holds our attention.
A Worthy Investment Vehicle?: Another piece of wisdom from Benjamin Graham, "The individual investor should act consistently as an investor and not as a speculator." If there ever was an investment vehicle driven by 'hype', gold is it. Of course there are a myriad of factors which actually sway the price of this metal, including entire countries' holdings, but for the individual investor, it usually boils down to what they see on CNBC or some other media outlet as to whether or not they think it's a 'buy'. Purchasing an equity or commodity because you just heard someone say its a good idea or 'everybody's doing it' definitely qualifies as speculation, not 'investing'. So here goes an attempt to plant a seed of discouragement towards a current purchase...and just so you know, I could care less which way gold actually goes, I sold all mine a while back.
Short History: Having followed gold, GLD, GDX (miners), GDXJ (Junior Miners), FCX (Freeport McMoRan) and many other smaller gold and gold-mining companies very closely for several years now, I can tell you that its been one hell of a battle to call the direction these markets are headed. The basic story of gold as an investment is that it is the place where people, investment institutions, and countries; put their money for safety. Countries use it to balance their currencies and for other reasons, mutual funds use it either as a place of safety or in specialized funds as a means of growth of capital, as do individual investors small and large. Speculators also, more frequently and in larger numbers over the past decade, use gold to try to make a quick buck. The excitement gold has aroused is warranted based on its performance over the past 10 years. An 8 year chart of GLD (because GLD's inception was Nov 2004), an ETF that attempts to track gold, shows a tremendous rise from Nov 2004 to date, from $45 all the way to $133, that's 195% up.
And if you had started at the beginning and pulled your money at the top in August of 2011 when GLD was around $188 you would have pulled in 317%! But nobody is that perfect. GDX (Market Vectors Gold Miners ETF), and GDXJ (Market Vectors Junior Gold Miners) are both a way to gain leveraged exposure to gold. Why leveraged? Because a mining company pays a certain amount to get gold out of the ground, somewhere between $282-$1519/oz (let's use $700/oz as an average). These numbers come from a nice price breakdown on Visual Capitalist. So if the cost, albeit variable, is known, and the price of the underlying commodity, in this case gold, goes up and down, then the profit from these mines as you can imagine goes up and down way more on a percentage basis than gold's price does. Let's say you pay $700 to get an ounce of gold out the ground and the price of gold is $800 an ounce. Then of course you made $100/oz. If the price of gold doubles to $1600/oz, then you're making $900/oz. So relative to the 100% increase in the price of gold, your profit has gone up 800%. Let's take a quick peak at the last seven years of GDX since it was introduced to the market.
Incongruent: If what was just written above about the price comparison of gold to its mines was the only factor to move the market prices of mines, then we would expect, when comparing a chart of GLD to GDX, to see basically the same chart with a much higher Alpha with more volatility in the GDX chart and even better performance in the long-run. Well, we do see more volatility, but GDX has underperformed GLD by a landslide...what the heck? Mines have the unfortunate characteristic of being linked to gold but also being strongly linked to the equity markets. So when markets crash and gold goes up, it is not necessarily the case for its counterparts, the mines. In fact, it takes a special balance for mines to rise. Following them for years it appears that mines do well when the equity markets and gold do well. But to their disadvantage, if gold falls, mines fall, and if stocks drop, mines drop. Using mines as a leverage to gold can therefore be quite tricky, with several variables at play.
The Future: My outlook on gold in general is not too positive. Though it is a commodity that will always have the attention of the human race, now may not be the time to get your feet wet if you haven't already. Yes, it is easy to find an article contrary to this one, stating that we are in 'volatile' or 'dangerous' times which historically put gold at the forefront of the best yields in the market. I just think that the safe haven gold has been in the past is not what it's cracked up to be for the near future, at least till the end of 2013, then we'll re-evaluate. Gold is a much riskier play than it used to be in no small part due to the phenomenal attention it's received in the past couple years. This attention and general awareness of it's existence as a possible investment has changed the norm for gold as a 'stable' investment, where now, from the charts above, it is anything but stable!
Conclusion: Gold had a good run, and of course it's certainly possible that this article will prove to be on the wrong side of the market by the end of the year, but I am not looking to buy it for quite a while now. In fact, I'm not looking to pick up any GLD until it breaks $100. Even then it will have to show some very bullish signs to warrant a purchase. As far as the mines go, well, they have a much bigger story to tell but that will have to wait for another article. For now I'm staying away from GDX and GDXJ as well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is for entertainment and informational purposes only and is not a solicitation to buy or sell any equity