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A comparison of the % returns the wide range
of gold investment alternatives achieved in 2009 clearly shows that gold bugs
were misguided in focusing on gold bullion alone. Why? Because gold was NOT
where the major profits were realized – not by a long shot!
Gold Bullion up 24%
While gold bullion was ‘only’ up
24%* (and silver up 49.3%*) it did nothing more than match the performance of
the S&P 500 and the Reuters/Jefferies CRB indices at 23.5%* for both. Why
all the hype regarding gold bullion over the past few months when most other
commodities and their related stocks and long-term warrants did so much
better?
HUI up 42%
A basket of large cap gold and silver stocks,
as represented by the HUI, was up 42.2%* (the Gold Miners Index and its ETF
proxy were up 36.4%*).
S&P/TSX up 52%
An investment in Canada’s heavily
commodity based S&P/TSX a year ago would have generated a 52.3%*.
Commodity Companies Index (CCI) up 126%
Those investors who invested in a basket of
stocks consisting of all 36 companies involved in commodities with long-term
warrants, as included in my proprietary CCI consisting of
a) 29 companies involved in the mining, developing or exploring of gold
and/or silver ( 22), uranium (1), cobalt (1), molybdenum (1), lead (1), coal
(2) and iron ore (1)
b) 3 companies involved in buying secondary gold or silver production, i.e.
royalty streamers
c) 2 companies involved in oil and gas production and exploration and
d) 2 merchant banks involved in financing commodity-related projects,
would have experienced an impressive gain of 125.8%* in 2009.
Commodity Company Warrants Index (CCWI) up
242%
The very, very few in the know who invested in
a basket of the 47 warrants associated with the above commodity categories (6
companies offer two or three long-term warrant hence the larger number) that
trade on the American or Canadian stock exchanges, as per my proprietary
CCWI, were up an amazing 242.3%* in 2009. Yes, that is correct: 242.3%!!
For those many who are not familiar with
warrants they give the holder the right, but not the obligation, to purchase
the common shares of the company at a specific price within a specific time
period after which, if not exercised, they expire worthless but which can be
traded as required just as with the associated stock.
In previous articles I have gone on and on
about the leverage advantage (i.e. enhanced returns) of warrants and here is
a perfect case in point. The warrants in the CCWI generated twice the returns
of their associated stock in the CCI with the same degree of risk.
That’s the major advantage of warrants vis-a-vis their associated stocks.
Gold and Silver
Companies Index (GSCI) up 85%
To be totally objective in
this analysis, however, the average increase in the stock of the 22 companies
with long term warrants that were exclusively involved in the mining, developing
or exploring of gold and/or silver were up, according to my proprietary GSCI,
somewhat less but still an impressive +84.5%* for the year.
Precious Metals Warrants Index (PMWI) up 140%
It gets better! The long-term warrants of the 22 companies involved in
the mining, developing or exploring of gold and/or silver appreciated,
according to my proprietary PMWI, by 139.7%*.
Royalty Company Stock up 93%
Had you invested in the stock of the 3 companies, with long-term
warrants, that buy the secondary gold and silver production from base metal
miners at fixed prices you would have had a 92.6%* return in 2009.
Royalty Company Warrants up 213%
Best yet the warrants of these 3 companies were up 2.5 times that of
their associated stock at 213.0%*. How’s that for enhanced returns!
Where Should You Invest in 2010?
As you will recall I recently wrote an article entitled “Gold:Silver Ratio Screams Buy
all Things Silver!” whose conclusions, coupled with the conclusions in
this article, strongly suggest that the buy of this decade will be the
warrants of gold and silver mining stocks and, more particularly, the
warrants of gold and silver royalty companies and specifically the warrants
of silver royalty companies.
Conclusion
Don’t follow the herd when it comes to investing in gold (and
silver) in 2010. Remember, gold was ‘only’ up 24%* in 2009 and
the HUI ‘only’ 42%* yet the long-term warrants of the gold and
silver mining companies were up 140%* and the long-term warrants of the gold
and silver royalty companies were up 213%* on average. If the current bull
market in commodities continues in 2010 it behoves
you to seriously consider investing some money accordingly.
The next time you read an article hyping why you should buy gold
consider the better returns available were you to invest in an alternative to
gold bullion itself.
*All performance return calculations in this article have been on the
basis of realizing profits in U.S. dollar terms. The original article was
posted on Kitco as “Did your Gold Investments
Return 24% in 2009 – or 179%?” with differences in some numbers
because lower Canadian dollar performance numbers were mistakenly used in
some cases.
The constituent companies in each of the GSCI/PMWI or CCI/CCWI can be
found under the “Warrants/LEAPS/Options” section in articles
entitled “GSCI/PMWI Constituent Companies” and “CCI/CCWI
Constituent Companies”.
Lorimer Wilson
Lorimer Wilson is Editor of www.FinancialArticleSummariesToday.com (F.A.S.T.) and www.MunKnee.com (Money, Monnee,
Munknee!) and an economic analyst and financial
writer. He is also a frequent contributor to this site and can be reached at
editor@munknee.com.
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