Nothing Worse For Gold Exposure Than Doing It Via Miners?

Nothing Worse For Gold exposure Than Doing It Via Miners? by Attain Capital

A caddy on the golf course this past weekend asked one of Attain’s partners (Jeff Malec) what the caddy’s mom should do with her Gold bars. She thought it was a no brainer to load up on a few hundred thousand dollars worth of physical yellow metal back in 2010ish, but is having second thoughts of late with the barbarous relic off more than 30% since its highs, while other commodity markets are making new highs  (Coffee up 75% YTD, Cattle at all time highs – past performance is not necessarily indicative of future results).

Mr. Malec asked the caddy if he had ever heard of Warren Buffet. The caddy said he had, and Mr. Malec proceeded to tell him to pass along Buffet’s thoughts on Gold:

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Here’s some other good Buffet quotes on Gold.

But those reading the Wall Street Journal of late might think the play is to ditch the physical gold and instead invest in Gold Mining companies. The WSJ detailed about a month ago (Aug 8^th) how the Gold Miners Index (GDX) was up 26% YTD, with the catchy headline “Hedge Funds are Digging Gold Miners”.

 (Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: WSJ

We’ll admit their graphics are pretty chic, and with a quote from BlackRock, Inc. (NYSE:BLK) and a Gold Fund about the Gold Miners rebounding, I’m sure more than a few people were swayed to get into Gold Miners.

“Gold companies just don’t look as expensive as they did in previous years… and you have a sentiment that is warming toward gold,” said Catherine Raw, a portfolio manager for BlackRock Inc.’s $451 million Commodity Strategies Fund. She raised her fund’s exposure to gold miners at the start of the year.”

“The industry has done a lot of belt-tightening and a lot of soul searching, and is on much firmer footing that it was two years ago,” said John Hathaway, who manages $1.6 billion at the Tocqueville Gold Fund.”

Except, here’s the thing…. It looks like there could be nothing worse for your Gold exposure than doing it via Gold Miners:

 (Disclaimer: Past performance is not necessarily indicative of future results)

That 26% increase in GDX doesn’t look like much on this chart, and the index is currently in a 50% drawdown since the start of 2008. So much for soul searching…. As we talked about before, investing in commodity production companies isn’t easy. You not only have to determine where the commodity is going, but also if the business side is being successful at the same time.

So whether the Caddy’s mom follows Warren Buffet and switches into an investment with a little more utility, or keeps holding her Gold bars (or better yet – free up some capital by switching into Gold Futures, which you can in the graphic above track nearly exactly the same), she should beware jumping into Gold Miners, no matter what Hedge Funds are supposedly doing via the WSJ.

P.S – If you’ve ever heard the story about the Wall St. guy selling right before the Great Depression because the shoe shine boy gave him a good stock tip, that’s a type of contrarian investment where you go the other way as soon as its apparent everyone is looking at something the same. Bespoke Investment Group actually plotted such headlines (via the Drudge report) versus the market and you can see quite a contrary indicator). Along those lines, what do you guess the Gold Miners have done since their focus in the Wall Street Journal?

 (Disclaimer: Past performance is not necessarily indicative of future results)

“The Managed Futures Blog is a compilation of thoughts, research, attempts at humor, and more from the team at Attain Capital Management (“Attain”). Attain pairs high net worth individuals, RIA’s, and institutional investors with alternative investments in commodities, managed futures, and global macro strategies through privately offered funds and managed accounts. Click here to sign up for their insight and analysis.”