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There are
many reasons to own physical gold. They arise from the financial and monetary
uncertainty impacting investors around the globe. Some of the more obvious
reasons are:
 Weakening economic
activity and rising inflationary pressures bring back unpleasant memories of
the stagflation experienced in the 1970s
Geopolitical
tensions remain a major area of focus
The ongoing
sovereign debt crisis and the knock-on effect it is having on the solvency of
some of the world’s largest banks because they own too much government
paper
By owning
physical gold you are protected from the above because physical metal does
not have counterparty risk. But do you also want to own the shares of gold
mining companies? There are two things that need to be considered to answer
this question.
The first
is will the mining shares do well if gold appreciates? The answer is maybe.
Normally the shares of gold mining companies appreciate at least as much as
the price of gold, and sometimes do even better. But it does not always work
out that way.
For
example, from 2001-to-2011 gold has appreciated 14.5% per annum over these 11
years in terms of euros, and 17.7% per annum when gold’s price
appreciation is measured in terms of US dollars. Over this same period, the
Philadelphia Stock Exchange Gold and Silver Index, which in North America is
a widely followed measure of gold mining companies, appreciated 3.2% per
annum. Even when taking dividends into account, the mining shares over this
period of time did not appreciate as much as the gold price.
Over the
last 11 years, the shares of gold mining companies have on the whole done all
right, and have in fact fared better than the general stock market. Clearly
though, the shares have underperformed gold. The reason is that the shares of
gold mining companies respond to circumstances differently than the price of
gold, which leads to the second and more important point that needs to be
considered.
The shares
of gold mining companies are not a safe haven like physical gold. Gold does
not have a balance sheet, management team, price/earnings ratio or any of the
other things that characterise the shares of mining
companies. This observation makes it clear that gold and mining shares are
fundamentally different, meaning that the mining shares may not be suitable
for everyone. Their risks need to be carefully studied, as is the case with
any investment.
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