Issue: 402
Sent: 13-07-2010 10:20:32
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Tapping Higher Gold Prices: Bullion or Equities?A How To Book Of Self Managed Super FundsEmail Marketing WorkshopsWhere to now with pensions?Email Marketing Business Opportunity - Helen Bairstow
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Tapping Higher Gold Prices: Bullion or Equities?

Click here to buy - A How To Book of SMSF's by Tony Negline
John Robertson

While gold equities are supposed to offer greater leverage to gold price rises than gold bullion, the experience during the current cycle suggests otherwise.

The US dollar gold price has risen at a 23.3% annual rate over the five years since 30 June 2005. Some analysts are suggesting further rises as a loss of confidence in fiat currencies causes investors to seek safer alternatives in which to hold their wealth. Others suggest the gold trade is simply a momentum play that will exhaust itself in due course ending in tears for those who have joined too late.

Putting those, albeit important, arguments aside for the moment, one of the issues for investors to address is whether they are better off getting their gold exposure by purchasing bullion or whether equities might be a cheaper and better returning alternative.

To some degree, equities have lost their competitive edge through the innovation of exchange traded funds such as the SPDR Gold Shares traded on the New York stock exchange. These are cheap ways for the retail investor to effectively buy and sell gold bullion. They count on physical gold backing for each investment as an important ingredient in their success. There is 42.2 million ounces of physical gold set aside for investors in SPDR Gold Shares.

In practice, the anticipated leverage has been harder to find than anticiptaed.

The Australian All Ordinaries gold index which has risen at a 20.0% annual rate over the past five years has lagged the rise in the gold price. Within the index, there are 36 stocks of which 29 could have been bought at the beginning of 2005/06. They rose at an average rate of just 17.0%, slightly slower again that the index. The median rate of increase was only 9%.

These numbers suggest that buying randomly would have left an investor well short of what he wanted to achieve. That said, 12 of the 29 stocks did do better than the gold price over this five year stretch suggesting that a closer study might have offered a chance to get the advertised leverage.

Unfortunately, it was not simply a case of opting for the best known stocks. Lihir rose faster than the gold price but Newcrest did not.

Picking the right gold stocks is critical. Over the last five years, returns have ranged from minus 43% to plus 88%. The dispersion in returns should make some additional analytical effort worthwhile. However, bullion seems a less risky alternative if an investor is convinced of the investment case for gold but lacks the necessary information to choose the right stocks.

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