Gold Versus Gold Miners: Has The Time Come To Flip The Switch?

Tyler Durden's picture

Last October, among the various statements by Hugh Hendry at the annual Buttonwood gathering was this blurb by the man who is otherwise a big fan of physical gold: "I am long gold and I am short gold mining equities. There is no rationale for owning gold mining equities. It is as close as you get to insanity. The risk premium goes up when the gold price goes up. Societies are more envious of your gold at $3000 than at $300." Vivid imagery aside, he was spot on as the GDX tumbled 30% since then. Yet with the gold miners now universally abhorred and hated by virtually everyone, has the time come to take advantage of the capitulation? That is the question posed by John Goltermann of Obermeyer Asset Management, a firm better known for its deeply skeptical view toward Apple express as part of its April 2012 letter, and which also ended up being spot on.

Goltermann says: "Whatever the reason, the underperformance of the mining shares in the last 18 months has been significant. At this point, because of the price divergence, the valuation disparity, and general capitulating sentiment, there doesn’t seem to be a case for selling mining shares. Given the valuations, we are evaluating whether it is appropriate to add to the position. The negative sentiment towards gold could continue for a time, but as economist Herbert Stein cautions, “If something cannot go on forever, it will stop.” When price divergences like this occur, they usually self-correct. In the interim, there is a strong case that gold mining stocks are cheap and that much bad news is priced in." Then again, as Hendry said, it may just as well be insanity.

Curiously, in some ways Obermeyer's thesis is the opposite of Hendry's:

We don’t especially relish owning gold as it’s unproductive and is the antithesis of financing great businesses and ideas. But we also accept the idea that gold is simply money, readily exchangeable globally and a store of value that cannot be debased by governments. For this reason we believe it continues to have a place in portfolios at the present time. Many view gold as simply an inflation hedge, but it can also be effective during unstable times or when the prospects for financial assets deteriorate. Admittedly, with so much tentativeness on the part of investors and consumers, high unemployment levels, and the lack of pro-growth policies in Washington, the risk of rapidly rising inflation is low in the near term. But with debt growth far outpacing GDP growth (see chart below), the debt will most likely have to be monetized through Federal Reserve purchases, economic growth will have to pick up significantly, or outright defaults on entitlement promises will occur. All of these scenarios could benefit the gold market. In the nearer-term, because of the current trend in debt growth, some unforeseen crisis could arise prompting capital to flow rapidly back to gold and mining stocks.


It’s always hard to know the appropriate weighting of an allocation to precious metals, and in what form the allocation should be. We believe the right answer on allocation is more than zero. The precious metals market can be subject to wild price swings independent of the stock market because there are a significant number of leveraged speculators and hot-money investors involved and their behavior can’t be predicted.

The flipside is that Hendry's side has been proven correct and some would say, played out. And with most things (at least in the Old Normal) mean reverting, has the time for the alternative finally come?

Full letter below:


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VonManstein's picture

Nice one on calling the bottom. Big up day tomorrow. Gold back over 1600?

DJ Happy Ending's picture

I hope not, the recent buying opportunity has been nice.

VonManstein's picture

you better buy the metal quick as miners will gap up big tomo. Bottom is in friend and they will outperform every other asset class before its over.

Hugh Hendry who hates gold miners is short the SP500 and long gold. he has been gettiing killed.

Hugh Hendry said the the USDJPY was going to 50

Hugh Hendry is great... but just dead wrong. Any small investigation of Gold miners cyclical nature dissproves all bears!

otto skorzeny's picture

I like Hugh-but he should stick to tobacco stocks

strannick's picture

25% gold in a portfolio? Wonder what he would think of portfolio allocation of 0% gold, 50% gold miners and 50% gold miner options. Yes craven tax and spend bureaucrats are eyeballing yer in-the-ground gold, but the ups far outweigh the downs.

Last Sept-Oct when the SnP started tanking, gold and miners took off. Maybe the 2008 curse of throwing out the gold baby with the stockmarket bathwater is over. 

I never dreamed there would ever be winter 2008-type buying for miners, now here it is again, right here, right now. After options expiry on Mon, its show time!

Desert Irish's picture

Really? Why? Fuel accounts for 1/4 of all mining costs. When Gordon Brown was selling England's gold around $260 an ounce fuel was $10 bugs may be up for a rude awakining, I've longed gold in the short term but where's the upside? It's a currency race to the bottom

strannick's picture

Well, since you need silver (and all other commodities) , and silver (and all other commodities) has to be mined using fuel, I guess the price of silver (and all other commodities) will have to raise right along with the price of fuel. Cost push inflation I believe is how the eggheads refer to it? Then of course you add the silver-as-a-currency-substitute monetary-inflation aspect of silver, and its showtime!

ACP's picture

The Assholes That Be will keep pushing the price down until the market breaks.

We'll all see what happens when:

1) Production is cut due to increased production costs relative to spot price,

---and at the same time ---

2) Demand skyrockets, even more than today.

Will people simply refuse to sell gold at the bullshit spot price? Will "handling fees" of 10%, 20%, 30% be added to the price of physical, over the paper price? Uncharted territory.


Big Slick's picture

"It's as close as you can get to insanity."

Seriously??  "As close??"  Have you taken a look at what's happening out there?

augustusgloop's picture

Insanity. But even with a crazy woman running Argentina and confiscating foreign assets, Pan American Silver managed to raise its dividend 120% this week. 

GetZeeGold's picture



You buy paper gold for the pop. Holding it for any length of time is just begging for management to steal your money.

GetZeeGold's picture



.....but that doesn't stop people from trying it again....and again.....and again.

Crime of the Century's picture

It's quite simple really, Sinclair said unless I hold the actual certificates in my name, then I am at risk for being defrauded, even by firms that may be reputable at this moment. After seeing that Corzine still walks free, I am reverting back to the original thessis that first gobsmacked me into awareness, namely:

All paper will burn

ATM's picture

It is not a currency substitue. 


I belive silver is simply a high beta commodity. Great prospects in the near term but nothing like gold in the long term.


James_Cole's picture

"Any small investigation of Gold miners cyclical nature dissproves all bears!"

Yep, buy seasonally + sell earnings = easy money.

Edward Fiatski's picture

German GDP data could be a catalyst for USD & Gold.

Round & round it goes - where it stops? Nobody knows!

Newager23's picture

No one wants miners right now, or just about no none. The HUI is at 350. It has literally crashed. However, when there is blood in the streets, that's when you want to buy.

I think the best two bets are GDXJ and SIL. GDXJ is essentially a mid tier gold fund, but it has some silver miners and juniors. SIL is the ONLY silver miner ETF. Eventually it is going get a lot of attention.

I also like silver bullion at $28.50. We might not get too many more chances to buy silver under $30.

Those three investments would be an excellent foundation. I think they will all be 3 baggers.

Then you can look for some 10 and 20 baggers in the junior mining sector. It is high risk, but also high return. These are investment for higher gold and silver prices. If you agree that it is simply a matter of time before gold reaches $2,000, then these can be good plays. And if we see $3,000 gold, a 10 bagger isn't going to be that unusual. 

There are so many possibilities for the mining stocks to take off. If the stock market and the economy tanks, mining stocks might be one of the few sectors that thrives (if we get higher gold prices). Then the hedge funds are going to jump on these stocks and push them higher, thereby creating some momentum. Of couse this might not happen, but hot money always chases the trend.

I keep hearing that mining stocks are a stupid investment because their costs are rising too fast. But that is not true for all mining companies. Many of them have low costs and rising gold prices go right to their bottom line. Many of the miners are going to be incredibly profitable at $2,000 and $3,000 gold.

Look at the charts of GDXJ and SIL. Sure they could go down some more, but the upside sure is enticing. (for mining stocks)

boogerbently's picture

Judging from everything I've reqad, all gold comes from mines.....yes?

midtowng's picture

Whatever happened to the idea that miners lead gold? If 2008 taught us anything, when the overall stock market dumps, miners will get killed (and get get killed first).

CH1's picture

And how is owning a gold mine stupid?

buzzsaw99's picture

If your mine is in Africa your fortunes turn on the likes of Mugabe. Not to mention tremendous overhead, theft, bad management, interest on loans, labor disputes...

Cognitive Dissonance's picture

It is not.....right up to the point when it is nationalized. Then it suddenly becomes very stupid.

<I'll mitigate that risk by diversification and by not getting too greedy......meaning eventually selling, hopefully before the mine is nationalized.>

disabledvet's picture

i used to work with a gold prospector actually. long way back (80's)...Fillipino. We would go to old mining sites in Alaska and put on the diving gear to find what they missed. He was pretty tight lipped about how well he did...but he did have nice diving equipment. I've been told "they miss a lot sometimes."

otto skorzeny's picture

because it's a massive pain in the ass as far as overhead-heavy equipment,fuel,maintenance,labor,EPA/OSHA(US),warlords(Africa)etc.

nmewn's picture

Strictly speaking on a contractual basis, possession is 9/10ths of the law...the other tenth is brute force and the willingness to use it.

A common stock holder falls (contractually) on the bottom teir of bagholders because really all you have is a paper receipt that someone else sold you as evidence of, someone elses capital was exchanged.

The bond holder has more claim than the preferred stock holder...etc.

Cognitive Dissonance's picture

Buy them when they are most hated, sell them when they are universally loved.

<I hate my miners and I really hate my minor miners. Time to load up the truck.>

rosiescenario's picture

....also the situation in So. Africa longer term is going to be a big benefit to those other gold and silver miners who have mines in politically stable areas. I used to be an investor in So. Africa when it was a stable country and did very well with miners such as ERGO, Rus. Plat., DeBeers, etc.


Besides the current labor unrest in So. Africa, the mining companies are doing the barest of maintenance and for good reason.


In 1970 So. Africa produced 2/3 of the world'sgold. It now produces about 25% and that number is still declining.

disabledvet's picture

gold mining is a bear of a business. Couer d'lene had a good day today...silver mining company out in Idaho. TERRIBLE start to the year for them...but silver mining can reveal a LOT of product. Venezuela (oil) Argentina (copper, lithium) and obviously all of Canada have a lot to offer...for a price. "dat be Wall Street banker bucks" so generally i avoid it. these are guys who plunk down 10 billion...lose it...and somehow move on. the best equities going on thirty years now are US and Canadian based railroad stocks...clobbered everybody actually. (my starting point is 1982.) in this "macro" environment i really fail to see how Union Pacific, Norfolk Southern, Kansas City Southern or Canadian Pacific (what a tear that one has been on) still strikes me as the best way "to play the whole thing." in other words if the dollar collapses, Canada breaks apart, Mexico erupts in revolution, blah...blah...blah.."the railroad will still be running." like i said though "i'm out of the index" for now. nothing wrong with "playing the market" (as in the whole thing) either in my view.

MillionDollarBoner_'s picture

Its stupid when you've made all the investment just so some politico can "take back for the people what is rightfully theirs"...

otto skorzeny's picture

Iran tried to do that in the 50s but BP got the CIA to put the murdering, torturing Shah in place and that worked out so well-all we got was a stupid movie like "Argo" and a future WWIII

urbanelf's picture

I've been putting money into TGLDX every month.  It's been brutal.

Non Passaran's picture

Ten days ago I perfectly timed my purchase of NUGT :-)

fonzannoon's picture

it's so funny that the reason you should not own these completely useless pieces of shit is that they are so valuable everyone knows the gubbamint will eventually take them over.

SilverMaples's picture

The miners are forced to sell their production at these clown prices in order to finance up their operations, which is in part helping this ongoing manipulation buy supplying the fraudsters with fresh stolen ressources. Holding the miners means getting robed until the prices apreciate much further, or until they stop selling to comex and pals.

auric1234's picture

or until they stop selling to comex and pals.

What makes you think this won't happen real soon now?

One thing's for sure: the miners aren't going to work at a loss.


Mr. Fix's picture

I do not think that either gold, or gold miners will be allowed to rise significantly in price by the current governments.

 They will continue to manipulate for as long as they can, then they will nationalize the mines, and make gold ownership either illegal, or tax it at such a rate it becomes worthless.

 The forces that have been manipulating the miners, and the gold shares, are pure evil, and will need to be defeated.

 There is no legal recourse left on the planet to put a stop to their lawlessness.

Charles Nelson Reilly's picture

C'mon man, you're being very un-dude

VonManstein's picture

youlll be eating proverbial hat by Q2

steve from virginia's picture



@ Fix:


"They will continue to manipulate for as long as they can, then they will nationalize the mines, and make gold ownership either illegal, or tax it at such a rate it becomes worthless."


Like they ('They') do with cocaine and pot?



scatterbrains's picture

not to mention your shares (in street name) have to run through the DTCC. That alone is reason to avoid paper at all cost...(re-rehypothicate these nuts bitchezz)  but then if that's not enough your broker could go bust or be corzined then what ?  Why don't we quit with the paper bullshit and get real as in real phyzz.

IridiumRebel's picture

GDXJ nailed me last year.....I stay away. i knew then and there that the only gold I should own should be physical. 

Catullus's picture

A mine is a hole in the ground with a liar standing in front of it.  Good luck.

pitz's picture

Hardly, plenty of gold mines have good production, reserves, and diligent management.

Catullus's picture

And oh boy will management tell you about it.

Haole's picture

Turd Furgeson essentially lost his shit and went on a pretty well-deserved rant in his own defense today.

For this and a number of other reasons, the bottom in gold and silver is right around here somewhere. Not that it matters to me personally one bit... However, the dynamics, psychology and emotion of what is happening these days is quite fascinating.

I'll put money into Bitcoin long before I ever put it into another mining stock.

diogeneslaertius's picture

you cant print metal and no one will drill for paper

juniors are CHEAP but the money heads running the sector are fucking idiots (universality) who dont listen to the geologists

diogeneslaertius's picture

one day profit will take a back seat again

one day open source will dominate in software

the NWO is a fire in which the overman is tempered - only dragon slayers can survive today