commodity stocks v. commodities -- which will do better?

[grapejelly]

For what seems like months, precious metals have been outperforming precious metals stocks.

I'm wondering what the long run prognosis is for precious metals vs. stocks in producers.

How will do these stocks behave as stocks rather than as PM producers?

Should someone who wants to ride the PM bull buy equities or just the underlying metals?

[jk]

Re: commodity stocks v. commodities -- which will do better?

the metal is more conservative. the miners have leverage and will outperform in time, but are subject to company specific and industry-wide issues - e.g. energy costs. things that are bad for a company may be good for a metal - e.g. the flooding of one of camecos mines was bad for cameco but good for uranium. if there's a big stock sell-off, miners will be sold off too, at least for a while, even if the metal rises. i suggest a larger percentage of your pm's be metal [either physical or etf's], mostly gold but some silver. then a smaller percentage may be allocated to miners or a pm mutual fund.

[grapejelly]

Re: commodity stocks v. commodities -- which will do better?

I'm not sure that the miners in general will do better than the metals. Select ones will but I am not sure the record shows that in aggregate miners outperform.

[jk]

Re: commodity stocks v. commodities -- which will do better?

take a look at this:

http://stockcharts.com/charts/perfor...html?GLD,tgldx

use the slider below the chart to look at longer intervals.

[Finster]

Re: commodity stocks v. commodities -- which will do better?

For what seems like months, precious metals have been outperforming precious metals stocks.

I'm wondering what the long run prognosis is for precious metals vs. stocks in producers.

How will do these stocks behave as stocks rather than as PM producers?

Should someone who wants to ride the PM bull buy equities or just the underlying metals?

It depends greatly on how stocks as an asset class are doing. The stocks of companies in the precious metals mining business are first and foremost stocks. If your investment thesis is a bullish view on precious metals, then that's where you want to be. To invest in any corporate stock, you have to take into account management risk, political risk, and above all else, the time value of money. Unlike the metals themselves, stocks (like bonds) are financial assets that involve a future money discounting mechanism. When the discount rate applied to future money rises, the security falls.

No need to take my word for it. All else being equal mining stocks are little more than high-beta positions if the overall stock market crashes. Below are two charts showing what happened to them when the overall stock market crashed. The first chart is of the XAU versus the S&P 500 during the Crash of 87. The second chart is of the HUI versus the S&P 500 during the Crash of 02.

Neither is where you want to be if stocks are tanking.

[bart]

Re: commodity stocks v. commodities -- which will do better?

No need to take my word for it. All else being equal mining stocks are little more than high-beta positions if the overall stock market crashes.

And even when it doesn't crash, the volatility isn't exactly low:

[jk]

Re: commodity stocks v. commodities -- which will do better?

i don't think you can compare miners to general equity by just looking at crashes or volatility. in a crash the miners will get hit along with everything else, no doubt. but in an inflationary context the miners will recover and tend to magnify the movements of pm's.

[Finster]

Re: commodity stocks v. commodities -- which will do better?

i don't think you can compare miners to general equity by just looking at crashes or volatility. in a crash the miners will get hit along with everything else, no doubt...

I sure can! I just did it! ;)

Just take it for what it is. Unfortunately, there are a lot of naive investors out there who one way or another "got religion" on mining stocks, particuarly of junior precious metals mining companies. Part of the pitch is an economic armageddon-type scenario where the stock market crashes. No one seems to bother with actually looking to see what actually happens.

In fact the genesis of this religion has its roots in the aftermath of the 1929 crash. Gold mining companies went on to do quite well during the 1930s. But there were two key reasons that were unique to the period, too: 1) The government had price supports for their product (the gold price was fixed while all the others were falling), and 2) Ownership of gold itself was made illegal in 1933.

...but in an inflationary context the miners will recover and tend to magnify the movements of pm's.

This is a common misconception. In fact financial assets do very poorly when consumer price inflation is rising. And as noted before, commodity mining stocks are stocks, not commodities. In the 1970's, gold mining stocks outperformed the broad stock market, but underperformed gold itself.

This should be not at all surprising. As indicated above, stocks are financial assets that embed a future money discounting mechanism. When interest rates rise, the implicit discount rate on future corporate cash flow rises as well. As investor's time horizons collectively shrink, stock and bond prices fall. This is a headwind for ALL stocks, including those of firms that happen to be in the mining business.

No, it is simply not true that PM mining stocks merely leverage and amplify the price movements of the commodities these companies are in the business of mining. It is a widely held misconception, but that does not make it any less of a misconception. People do indeed buy gold mining stock merely because they are bullish on gold and mistakenly believe they're just buying gold with leverage. Uh uh. If you want to lever the price movements of gold, you buy bullion on margin or use the futures market. You buy corporate stock because you are bullish on the stock market, the company whose stock you are buying is well run, you like the balance sheet, etceteras; your outlook on the company’s product is only one piece of the picture.

...

[Finster]

Re: commodity stocks v. commodities -- which will do better?

And even when it doesn't crash, the volatility isn't exactly low:

[chart]

Hi ho Bart O' Chart!

Wow, where did you come up with that! The XAU had the longest history of all the PM mining stock indicies I could find, and here you dug up one that goes clear back to 1938. Do you have the data, or just the graphic? I'd like to plot it semilog and along with the broad stock market and gold prices.

[renewable]

Re: commodity stocks v. commodities -- which will do better?

Is it possible it's 'different this time' to the 87 and 02 crashes - PMs are currently in a bull market, they were in a bear or flat market during the last 2 crashes. Is there any info on a stock crash during a PM bull market?

[Finster]

Re: commodity stocks v. commodities -- which will do better?

Is it possible it's 'different this time' to the 87 and 02 crashes - PMs are currently in a bull market, they were in a bear or flat market during the last 2 crashes. Is there any info on a stock crash during a PM bull market?

Yes. Gold has been in a bull market since February of 2001 (it closed on 2/17/01 at $257.45), so the stock Crash of 2002 was during a gold bull market. In both instances, however, the price of gold itself held up very well during the actual stock crashes. Stocks greatly underperformed gold, and gold stocks greatly underperformed stocks in general.

The last gold bull before the current one would have been in the 1970's, and I don't have data specific to mining stock performance over short subperiods. But during the gold bull as a whole, gold mining stocks underperformed gold itself. So even if gold mining stock outperformed gold bullion during some shorter time frame, you'd have to be a prescient timer to take advantage of it.

The whole question, however, is complicated by the fact that it's not so easy to define "bull" and "bear" markets in the first place. This, in turn, is complicated by the fact that what appears to be a movement in the stock market or the price of gold may have little to do with changes in the value of stocks or of gold. It might be merely a change in the unit we're measuring them with. If, for example, the value of stocks stays the same and the value of the dollar shrinks, it will take more of the dollars to buy the same value of stocks. Did the stocks *really* undergo a "bull market"? Unless you have a way to distinguish such issues, it's best to avoid trying to label market movements and just stick with relative performance.

[spunky]

Re: commodity stocks v. commodities -- which will do better?

Buy/hold/sell the bullion yourself. Stocks is stocks

[DemonD]

Re: commodity stocks v. commodities -- which will do better?

A mining company i've been tracking is up about 30% this week.

Bart btw I don't know if that's your chart or not but I wanted to say if that's your chart then it's clear and understandable.

And Finster, as to the charts you posted, I reiterate my objection to using them because of the cherry-picked time and short duration of the charts. I remember looking at those a couple of months ago and one of them, the 02, had you bought right at the end of that dropoff, you'd be up HUGE right now, and that's the point of being diversified in cash is that you can buy at or near those bottoms. PM-based stocks have absolutely KILLED the actual metals over the past 6 years. I still maintain the biggest reason to hold physical gold is that you believe that all paper currencies will go to zero and you will be using actual metals to buy cars and bread and milk. Otherwise any of the the PM's you buy physically you will have to turn back into cash to buy cars and bread and milk anyway.

[spunky]

Re: commodity stocks v. commodities -- which will do better?

A mining company i've been tracking is up about 30% this week.

Bart btw I don't know if that's your chart or not but I wanted to say if that's your chart then it's clear and understandable.

And Finster, as to the charts you posted, I reiterate my objection to using them because of the cherry-picked time and short duration of the charts. I remember looking at those a couple of months ago and one of them, the 02, had you bought right at the end of that dropoff, you'd be up HUGE right now, and that's the point of being diversified in cash is that you can buy at or near those bottoms. PM-based stocks have absolutely KILLED the actual metals over the past 6 years. I still maintain the biggest reason to hold physical gold is that you believe that all paper currencies will go to zero and you will be using actual metals to buy cars and bread and milk. Otherwise any of the the PM's you buy physically you will have to turn back into cash to buy cars and bread and milk anyway.

1) You can say that about individual stocks from practically any sector at one time or another

2) I am not aganist them totally; if I had a few extra grand I wanted to gamble with,- I would pick a few of the smaller, obscure companies from stable countries.

3) Some government isnt going to grab my own personal holdings ,like they will the company you just bought stock in

4) you can sell your own stores, if you are willing to invest in a 50$ digital scale ,, travel a bit, or sell it online; it doesnt take an armageddon type scenario for one to invest in bullion


So why didnt you buy the stock 30% ago, Demon :confused:

[Finster]

Re: commodity stocks v. commodities -- which will do better?

And Finster, as to the charts you posted, I reiterate my objection to using them because of the cherry-picked time and short duration of the charts.

I reiterate my objection to your objection. Since the aim is to show how mining stocks perform in an overall stock market meltdown, the selection of time frame follows logically. Only if you insist on misinterpreting them as a blanket commentary on mining stocks long term can you raise such an objection.

I remember looking at those a couple of months ago and one of them, the 02, had you bought right at the end of that dropoff, you'd be up HUGE right now, and that's the point of being diversified in cash is that you can buy at or near those bottoms. PM-based stocks have absolutely KILLED the actual metals over the past 6 years. I still maintain the biggest reason to hold physical gold is that you believe that all paper currencies will go to zero and you will be using actual metals to buy cars and bread and milk. Otherwise any of the the PM's you buy physically you will have to turn back into cash to buy cars and bread and milk anyway.

That makes a little more sense. In fact I’ve pointed out before that buying these stocks at a stock market bottom has tended to be quite profitable. That’s also a logical inference from my statement about them being "high-beta". Now, if you can only tell when that "bottom" is …

Moreover, I’ve also argued in favor of diversification. Indeed, it is necessary to have something that didn’t crash when the stock market did in order to take advantage of the same. Part of that can be cash, part physical bullion, whatever, but if you are doing what I am warning against here and loading up on PM mining stock on the misguided notion that you are getting protection from a stock market crash, you will learn what I am saying the hard way next time that market meltdown happens.

As for your comment that "PM-based stocks have absolutely KILLED the actual metals over the past 6 years", you are cherry-picking time frames to suit your emotionally-based conclusion. In fact stocks as a whole have been in a bull market during the time that "PM-based stocks" have been doing well. What’s more, "KILLED" is rather overstating the case, I’m afraid. Gold and silver bullion are up by a factor of 2-3 times, while the HUI is up by probably 3-4 times. Meanwhile, if you were just going to buy stocks, you’d have done as well or better (with less volatility to boot) buying energy or REITS.