Monday, February 13, 2012

Golden Opportunity

Sometimes there are investment ideas galore. I subscribe to some free investment letters in the U.S. They may be a bit harsh and right-wing according to Canadian standards but some of the stuff presented are diamonds in the rough. So, I endure the right-wing rants and pick up some good ideas. This chart from one of those letters is quite instructive about the underperformance of gold stocks compared to the gold price. Since the chart was derived from another source than the newsletter and since this source is shown on the chart, I won’t mention the investment letter.

Normally Gold and Gold stocks are tracking each other quite well, but since April, 2011 this trend has changed. I guess, right now many investors consider gold safe and gold management something to be proven. The risk of starting up new mines; the potential escalation of production costs; land acquisition and financing risk is currently considered too high compared to its potential rewards. Most of the time, investors are less concerned about these risk issues, but last year during the height of the U.S. Debt Ceiling debacle, the European debt crises, the upcoming U.S. presidential election and a potential hard landing in emerging economies including China, risk tolerance was nil. We saw the same in the oil and gas industry.
Click on picture to enlarge

The result is, in my opinion, a temporary disconnect between Gold and Gold stocks as well as between Oil and Oil stocks. Gold companies now trade at a nearly 40% discount to the gold price. If you are a believer in stable or rising gold prices, here is an opportunity. I have pointed this issue out before and so have a number of investment advisers. My way of benefiting of this issue is buying an ETF of the TSX materials index (iShares S&P/TSX Capped Materials Index Fund, symbol XMA) which also includes agricultural commodity stocks such as Potash and Agrium. These latter stocks are also representing good value right now.

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