Why I Disagree With My Colleague About Gold Miners
I own gold coins, but for the same reason I carry a spare tire in my trunk.
I hope I never need it. But it’s there in case of an emergency.
However, I do like gold equities as an investment. In fact, The Oxford Club recommends that you have 5% of your liquid portfolio in gold and silver mining shares.
My colleague Mark Skousen disagrees.
In a recent Investment U column titled “How to Lose Money: Invest in Gold Stocks,” he said he had spoken with several doctors, lawyers and other professionals at a recent gold bug conference and discovered that many had lost 70% or more of their portfolios buying penny mining stocks.
These so-called “junior producers” - a misnomer since most don’t produce anything - are pure crapshoots. Worse, they are thinly traded and ripe for manipulation.
There’s an old saying that a gold mine is a hole in the ground surrounded by liars. But with penny miners, there’s often not even a hole in the ground. (At least not a new one.)
Skousen concludes that gold stocks “are terrible investments and definitely not a good way to build wealth.” He recommends them for only short-term speculation.
But I disagree with my buddy in this instance.
Not all precious metal shares are penny mining stocks. Companies like Newcrest, Franco-Nevada (NYSE: FNV), Agnico (NYSE: AEM), Randgold (Nasdaq: GOLD), Silver Wheaton (NYSE: SLW), AngloGold (NYSE: AU) and others are worthwhile investments.
While their price action is admittedly erratic, they have delivered decent returns over the long haul.
For example, the Vanguard Precious Metals and Mining Fund (MUTF: VGPMX) has generated a 4.52% average annual return since inception, even though it launched in the early ‘80s when gold was already on fire.
Granted, a 4.52% return in itself won’t speed up your retirement date. But the real value of blue chip gold shares is that they aren’t well-correlated with stocks and bonds. That makes them valuable diversifiers.
For example, if gold shares have a good year and rally 25% or more - as they have over the last year - they will provide a significant boost when you rebalance your portfolio.
Annual rebalancing - selling back the asset classes that have appreciated the most and putting the proceeds to work in those that have lagged the most - allows you to both increase your returns and reduce risk.
The Vanguard Precious Metals and Mining Fund makes up 5% of The Oxford Club’s Gone Fishin’ Portfolio, a strategy that has beaten the S&P 500 over the last 14 years with far less risk than being fully invested in stocks.
If you’re underinvested in gold stocks, the Vanguard fund is just one alternative. Another easy solution is to plunk a few dollars in the VanEck Vectors Gold Miners ETF (NYSE: GDX).
This exchange-traded fund has significant advantages over open-end funds...
- It has a lower expense ratio than most gold mining mutual funds.
- It can be traded continually throughout the day.
- It is linked to an index as opposed to being actively managed. (So you don’t have to worry about the fund manager underperforming his benchmark.)
- The shares are highly tax-efficient.
- You can use trailing stops, something that is not possible with open-end mutual funds.
- And, unlike gold mutual funds, it will never close to new investors.
The VanEck gold miners ETF is linked to the NYSE Arca Gold Miners Index, which owns the world’s leading gold and silver mining companies, including all those named above. It allows you to capture the performance of the entire sector with a single, well-diversified investment.
The annual expense ratio is half of 1%. Shares can be margined, if you desire. And there are call options available for traders who prefer to play the sector more aggressively.
As I’ve argued over the last several columns, Washington’s unwillingness to rein in entitlement spending may eventually prove disastrous... and inflationary.
Gold stocks have been a better inflation hedge than gold itself. And they move independently of most stocks and bonds.
In short, blue chip mining companies are a fine inflation hedge and a great portfolio diversifier.
They belong in your portfolio... precrisis.
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