Which Is Better: Gold Or Gold Stocks?

“The impact of the rate of inflation on the price of gold is like tracking the footprints of an animal.”  — Julian M. Snyder (quoted in The Maxims of Wall Street by Mark Skousen)

The Midas metal has been on a tear since 2001. Since then, the world has witnessed two major stock market collapses, a boom-bust in real estate, the Great Recession and a European debt crisis. Throughout it all, gold has increased from $300 an ounce to nearly $2,000, before retreating (it currently is around $1,750 an ounce).

Above all, remember that political and economic crises mean more government and more inflation. The central banks have been busy printing a lot of new dollars, euros and yen since 2001. It was clearly catch-up time for commodities in general and the precious metals in particular.

Gold Is Now A Superior Inflation Hedge

What have we learned about gold? First, gold has maintained its purchasing power for centuries. Business professor Roy Jastram did the original research on this fact in The Golden Constant. The following chart demonstrates this fact:

Source: www.thechartstore.comWhat’s interesting is how gold has broken out on the upside of its long-term purchasing power ever since 1971, when the United States and the world went off of the gold standard.

Gold is now a superior inflation hedge by a considerable margin, especially if you buy it when it’s cheap (1971, 2001).

It always was said that a $20 Saint-Gaudens double eagle gold coin could buy a tailor-made suit in New York in the 1920s. Today, at $1,750 an ounce, you can buy three tailor-made suits.

The same holds true for the silver dollar. In 1960, a silver dollar was worth $1 in paper dollars. Today, it costs $38.

However, it also is important to remember that since going off of the gold standard, precious metals prices are volatile. Gold went through a 20-year bear market from 1980 to 2000.

What About Gold Stocks?

If you thought gold was volatile, gold mining stocks are even more so. Typically, in a bull market, if gold doubles in price, you would expect gold mining stocks to triple or quadruple in price.

However, recently (see the preceding chart), just the opposite has happened. Gold bullion (GLD) has risen sharply, and the gold stocks (GDX) have failed to keep up.

What gives?

To find out, I called the world’s expert on mining stocks, Rick Rule. Rule is president of Global Resource Investments, a brokerage firm specializing in natural resources that is wholly owned by Sprott Inc., one of the world’s preeminent natural resource investment firms. I’ve known Rule for more than 30 years as a friend and as a valuable adviser.

Five Reasons Why Mining Stocks Have Lagged

Rule offers five reasons for this disparity:

  1. The introduction of the gold exchange-traded fund (GLD) has made it easier for investors to invest in pure gold. Before GLD was available, investors had to buy physical gold through coin dealers or foreign banks.
  2. Gold equities anticipated the run up in gold prices five years ago, and the metal had to “catch up” to expectations already built in to the equity markets.
  3. Mining companies have disappointed investors; they have failed to perform in increasing free cash flow and profitability, relative to the rapid rises in commodity prices. Rule blames this lack of leadership on the 20-year bear market in gold (1980 to 2000); the best managers went to more profitable opportunities (high technology, etc.).
  4. The mining industry has gone through its own version of inflation, through share dilution. Market capitalization has risen much faster than share prices, as companies have resorted to issuing new stock to raise capital. (We’re seeing this share dilution especially in the “rare earth” and “uranium” stocks in the past few years.)
  5. Up to 90 percent of all junior mining companies — all heavily diluted — are “no good,” according to Rule, and investors are heavily discounting their value.

Why The Gold Market Is About To Change

But Rule has good news. While the competition with gold and silver exchange-traded funds will continue, mining companies are now inexpensive relative to bullion. Investors will be rewarded accordingly.

Here are the reasons why mining stocks are about to soar in the next few years:

  1. After a 10-year bull market, good managers have returned to the mining sector.
  2. Top mining companies are generating dramatically higher profit margins. Free cash flow is now “gushing” and will double in the next year as huge capital investments by the major mining companies paid off.
  3. Expect enormous consolidation as major mining companies start buying up smaller producers at startling premiums to current market prices.
  4. New discoveries are expected as 10 years of exploration pay off. The gains accruing to successful exploration efforts can be explosive.

Where To Invest

Rule is constrained by regulation from making recommendations, but his clients report a fondness for Barrick Gold, Goldcorp and Kinross, among the majors; Royal Gold and Franco Nevada among the royalty companies; Perseus, Lydian and Esperanza among the developmental juniors; and Vista Gold as an undervalued takeover target. I also like IAMGOLD (IAG).

And if you like to hedge your bets and earn a dividend yield of more than 10 percent while you wait for mining stocks to go up, consider investing in the Gabelli Gold and Natural Resource Income Fund (symbol GGN).

–Mark Skousen
Editor, Forecasts & Strategies

“Rush” To Exit The United States?

“I’ll just tell you this, if this [Obamacare] passes and it’s five years from now and all that stuff gets implemented, I am leaving the country. I’ll go to Costa Rica.” Rush Limbaugh

Dear supporters of Personal Liberty,

Rush is right. Our personal and financial freedoms are threatened now more than ever, and smart people are seriously looking for the best loopholes to escape ObamaNation, including the possibility of leaving the country.

Intrade, the political futures market, now shows that Obama’s Deathcare legislation, with all its huge tax increases and regulations, has a 59 percent chance of passing. That’s scary.

We now enter “Phase II” of the Obama regime, and it will be more dangerous than Phase I (the first year). Obama and his radical Democrats are becoming more radical in Phase II. We survived the first year of the Obama administration without much damage, but now the White House has decided to turn up the heat and go all out to push through Obamacare, his unpopular trillion dollar program of socialized medicine.

This radical measure, on top of sharply higher taxes, closing of legitimate deductions and loopholes, draconian regulations on Wall Street, consumer “protection,” increased union power and multiple attacks on business can spell only one thing: more deficits, slower growth and quagmire on Wall Street.

How to profit? Besides buying gold and silver, you might consider getting some of your money outside the country, or even considering leaving the country. Rush might be on to something.

One of our most popular sessions at FreedomFest last year was on the personal and financial benefits of leaving the country and living abroad. Led by such tax and estate planning experts as Vernon Jacobs and Marshall Langer, the room was packed with people who wanted to know more about the financial and personal benefits of moving abroad (without giving up your citizenship).

After all, more than 3 million Americans have already moved abroad and are saving millions in taxes, and enjoying personal liberty. They’ve moved to Canada, Mexico, Central and South America, the Caribean, Europe and Asia.

Langer, the world’s foremost tax attorney, asked the audience “How many of you want to know about moving to a low tax state such as Florida?” A few hands went up. Then he asked, “How many of you are interested in moving to a foreign tax haven?” Almost every hand went up!

Moving to a foreign tax haven doesn’t mean giving up your U.S. citizenship, although some have taken that drastic step. I personally lived in the Bahamas, a tax haven, for two years without giving up my citizenship and saved a ton of money in taxes. It was life in living color! (For those who want to read my story, Easy Living: My Two Years in the Bahamas, go to www.markskousen.com.)

Good news; we’re going to repeat those special sessions at this year’s FreedomFest. The session, “The Tax and Financial Advantages of Moving Abroad,” will be led by experts Vernon Jacobs, CPA, and Robert Bauman, president of the Sovereign Society (and former US congressman) and a contributor to Personal Liberty Digest.

By attending this year’s World Economic Summit at FreedomFest you can learn specific ways to protect your business and your investments from the unprecedented onslaught of our freedoms. More details can be found at www.freedomfest.com.

Speakers this year will include Steve Forbes (president and chief executive officer of Forbes, editor in chief of Forbes magazine and a former presidential candidate), John Mackey (CEO of Whole Foods Market) and Greg Mortenson (author of the famous book, Three Cups of Tea, and the most admired American in the Middle East).

An incredible number of top financial gurus will also be speaking at this year’s FreedomFest. Back by popular demand is Donald Smith, the New York money manager who has the best track record—an average annualized return of 12 percent a year since 1980—better even than Warren Buffett! His fund was up 65 percent last year.

He is so impressed with FreedomFest that he is bringing 20 of his friends/colleagues with him this year. Now that’s what I call catching the spirit of FreedomFest.

Yours for peace, prosperity, and liberty, AEIOU,

Mark Skousen