September 30, 2007
Buying Gold is the Purest Form of Speculation
From an interview with John Hathaway in this week’s Barron’s (emphasis is mine):
When you buy a gold [company’s] share, you buy it with one thought in mind, and that is because you think the gold price is going to go up. If [because of dilution] there are twice as many shares behind each ounce of gold as you thought you had, it cuts the upside in half.
Hold on, if that’s true why wouldn’t you just buy gold directly through the ETF (GLD)? Why would you ever mess around with any gold mining company stocks?
Here’s a monthly chart of gold over the last fifteen years. Note the bottom: $251.95 back in August 1999.
I really liked James Surowiecki’s article in the November 29, 2004 issue of the New Yorker, Why Gold? I’d also like to point out that the yellow metal is up about 67% since he wrote it. ;-)
October 2nd, 2007 at 1:01 pm
That is strange about how they are say the upside is cut in half. Most speculators, including Dines and Casey, have always recommended mining stocks over the underlying commodity. Look at the leverage of the rise (and fall) of uranium stocks vs the price of uranium itself.
Also, as the price of a commodity increases, or a hard asset such as gold increases, mining costs change little. Thus the inherent leverage in mining company stocks.
(They are the only way I have covered my “trial” into day trading.)
October 15th, 2007 at 11:04 am
Eric: From Jim Grant’s article, The Bullion Puzzle:
“I ask him: ‘Why not just invest in GLD, the gold ETF, rather than in the mining companies in which you do invest?’ Hathaway says that investing in this exchange-traded fund, StreetTracks Gold Trust, which tracks gold prices, not mining company stocks, might have made sense a couple of years ago. But it’s not necessarily the most enlightened course of action today. So miserable are mining company returns on equity, so marginal are the overall economics of the business, he says, that a change in the price of gold should translate into a much larger change in the profits of a miner. ‘Let’s just hope that the industry does a better job in managing their prosperity than they did before’ he says.”
November 7th, 2007 at 7:53 am
Oil at $97, gold at $830, and soybeans at $10.25/bushel and they tell us that inflation is moderate. Who are they kidding?
Bill Henner
www.protraderblog.com