Did GLD And Other Gold ETFs Kill Gold Stocks?

Tyler Durden's picture

In a just released piece by Goldman's Eugene King which explains the firm's justification for why gold will peak at over $1900 in 2012, and which we will discuss in greater detail shortly, Goldman brings up a very interesting point, namely that the ongoing weakness in gold stocks, and the broad decoupling of gold miners from gold price can be attributed to one primary thing: the emergence of synthetic means of expressing a position on the gold market and "bypassing" direct gold cost pass thru exposure in the form of gold stocks. Supposedly this is a good thing, although we would caution that this is potentially a very insidious scheme to allow the world's cash-rish entities (read banks full of those ones and zeros that these days pass for "money") to procure real gold assets at very cheap prices and valuations, even as the broader retail investors proceeds to chase paper gold in the form of "synthetic CDOs" such as GLD (which as we first noted over a week ago may well disappear when the paper claims collapse and suddenly everyone has a claim on the underlying physical), only after the fact realizing they merely used gold as a paper pass thru equivalent. In other words, as the broader population continues to realize that gold is the real safe asset, yet invests in legacy forms of exposure, i.e., paper, the real hard assets: firms that actually extract gold from the ground and process it, remain out on the auction block to be snapped up quietly by all those who want exposure to the primary source of the metal, which they can then throttle at will in order to manipulate the supply side of the equation post facto.

From Goldman which notes one of the primary reasons for gold equity underperformance compared to the spot gold price:

Increased ability to access physical gold: The introduction of ETFs, growth in the transport, storage and insurance industries to support secure warehousing, and development of a liquid, reliable options market meant that investors who previously had to buy equities to gain access to the underlying commodity could now just buy gold directly. Up to 2003/04, gold equities traded at a premium multiple, reflecting the relatively higher demand from mining and gold investors who wanted to access the gold price, but had limited other means to do so. Therefore, even as the amount of capital invested in gold has increased, it is being fractured into multiple channels for investment.

And the chart that speaks a thousand essays:

To be sure, in our day and age of quarterly expectations, gold miners have not been very good at keeping the investor base happy:

But that is to be expected - input costs move far faster than the cost of the underlying product. And when dealing with a secular shift away from paper and to physical exposure, the transition will take a long time. Which begs the question - shouldn't investors be more patient when dealing with gold miners?

Because as the following chart shows, Gold miners have obviously decoupled:

And in the meantime input costs have been rising far faster, which further makes gold equity investors uncomfortable

Goldman summarizes all of this as follows:

In 2H2011, three factors have made this phenomenon all the more noticeable to investors:

  • the speed of the gold price move in 3Q2011 created a lag, as investors needed to see the price sustained at higher levels;
  • a strong belief in a higher gold price meant there was no need for equity exposure to get the upside; and
  • given the economic uncertainty, sector rotation out of equities took place throughout 2011 and gold equities were not immune.

…and the gold multiple premium is going, going, going – we think it’s gone

Looking at the reasons we identify for gold equities lagging the gold price – the rise of ETFs/physical investing options and declining returns – it is hard to imagine a time in the future when these two issues will reverse and investors flock back to gold equities. In our view, it is more likely that returns continue to decline as capital intensity increases, cost inflation comes through and tax/royalty structures enacted by governments around the world extract more from the mining industry. As the gold price has increased, consensus earnings have risen, yet the stocks have underperformed on a relative basis – the only explanation for this is that the stocks have de-rated. Looking only at the stable producers in our coverage, P/E multiples have fallen (Exhibit 3). Production underdelivery and higher capital intensity leading to lower returns are key factors behind this de-rating.

So while we appreciate the fundamental and technical reasons for why gold stocks are underperforming, the sinking feeling we have is that as synthetic exposure in the form of CDOs has surged in the past decade, allowing more and more retail investors to foolishly believe they are invested in "actual gold" (and not paper claims thereof), this has acted as a grand distraction preventing those who want real exposure in the form of controlling the underlying asset from expressing their interest in the right way. Because all it would take is for banks with a glut of credit money to bid up all the gold miners, and thus control the entire physical gold supply chain, at which point the "distraction" of precious metal ETFs can simply go away.

Our advice, as always, stay away from ETFs: they are nothing short of what synthetic CDOs were back during the credit bubble years. And take advantage of relative mispricing between fake (ETF) and real (miner) asset representation.

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achmachat's picture

Sometimes the choir likes being preached to.

Snidley Whipsnae's picture

We now have a banana economy and a banana judicial system backing it. If you are holding FRNs they will be decimated when printing resumes. If you are holding paper PMs or even physical PMs with a warehouse receipt... good luck.

"Trustee to Seize and Liquidate Even the Stored Customer Gold and Silver Bullion From MF Global"

"The bottom line is that apparently some warehouses and bullion dealers are not a safe place to store your gold and silver, even if you hold a specific warehouse receipt. In an oligarchy, private ownership is merely a concept, subject to interpretation and confiscation."



mrgneiss's picture

You have to hand it to the ponzi banker who dreamed up the gold etf's, especially the ones with their gold rehypothecated to infinity - kill the demand for physical gold and gold miners at the same time.  A central banks/fiat oligarchists wet dream.  I guess the major flaw in their plan was not forseeing the developing world wanting the amount of gold in their reserves to go from 0.5% or so to a lot higher, and actually demanding physical delivery.

Snidley Whipsnae's picture

"I guess the major flaw in their plan was not forseeing the developing world wanting the amount of gold in their reserves to go from 0.5% or so to a lot higher, and actually demanding physical delivery."


Yes... and as the developing world central banks begin buying more gold for reserves what are we witnessing? Anyone believe that the Anglo Americans will sit by while the fiat schemes are destroyed? How much gold can foreign central banks accumulate when their economy and currency are destroyed?

+1 mrgneiss

Oh regional Indian's picture

Hmmmm, yesterday RonP, today Gold. But I guess I like a little pushback.

Gold is falsely valued at this time and is only relatively priced. There is no absolute value/price for Gold anymore. Has not been since the Petrodollar economy flourished. 

3 swimming pools is a lie. Huge lie. 

And if gold is manipulated, you know how miners are manupulated. Heck, Barrick is a pappy Bush play, through and through.

Point being, there is really no pattern to discern in such a manipulated market (except opex times and the like). And in the true re-eval phase, the currency whcih we eval it in will be meaningless.

$55,000 an ounce. Right!



midtowng's picture

That's what I use. They have a solid track record and hold both gold AND silver.

I've given up on most of my miners. They tend to track the S&P too closely.

Smiddywesson's picture

If the Bernak follows through on his 11/21/2002 helicopter speech game plan, and it looks like he will, we are going to return to some sort of a gold referrenced standard and ramp the price of gold to devalue our currency.  How much we devalue the currency, and how high gold prices go, depends upon the balance sheet and how many defaults are politically acceptable.  Given that it's easier to steal from people through debasement than default on government promises, I'd say your $55,000 price target is a distinct possibility.

uno's picture

reason we are on the war tour through the middle east and soon Africa is to get the oil/gold other minerals, have to assume Venezula soon since they are getting their physical back

Monedas's picture

A lot of artificial supply satisfied appetites for Gold and surely hurt prices for the real stuff and the miners ! The miners have problems of their own....sitting ducks for taxation, environmental regulation, competition, expropriation and share holder dilution ! I'll stick to the real deal !  Monedas 2011  Comedy Jihad Not Buying Sizzle Nor Glitter

Smiddywesson's picture

Perhaps, but the big Boyz own the miners too.  That's an argument for holding miners.  However, the Boyz can afford to avoid taxation, we can't.

Still, the risk is there, so a wise gold bug must keep some physical around just in case.

russki standart's picture

One of the big problems facing junior miners are naked short sellers, who are able to pound the stocks down knowing full well that they must re-finance in the marketplace. Until the issue of FTD's is settled via criminal prosecution, this practice will continue to flourish on the TSX.

Nacho.Libre's picture

Soooo... a bit off topic, but along the topic of mining.  Can someone give me an idea or point me to a processing plant, preferably in Texas, that can process raw material to extract the metals, specifically gold, copper, and silver, maybe a little palladium?  Or some information on the extraction process that's bit more detailed than wiki?





mick_richfield's picture

A Canadian place called Aurcana bought an old silver mine in West Texas that had been closed since 1942.

I do not believe that they have started production yet, though.  ( But they have started building... )


I don't think there are any other operating silver mines in Texas.

Nacho.Libre's picture

Thanks.  Actually, the deal is that I have an uncle with a claim, but it's in Mexico.  He can mine the rock, but doesn't have the equipment for final extraction.  With the cartel stuff in Mexico, I suggested he transport the raw material to Texas for extraction.  The samples they have sent to labs show it very rich in Gold, but because of the high copper content, it apparently doesn't leach well, so there needs to be some other method for final extraction and I wanted to make contact with a refiner in Texas.

rosex229's picture

Wahoo! the Telegraph.co.uk site has referenced Zerohedge for the 2nd time in 2 weeks on their live debt crisis blog (its always the front and center "article" in their finance section)!

Check it out for yourself http://www.telegraph.co.uk/finance/debt-crisis-live/8965011/Debt-crisis-live.html (to speed up the process just hit Ctrl + F and type in "zero hedge" (two words).

I'd come here for my daily news fix regardless, but I'm having fun pondering zerohedges break into contemporary news sites.

jekyll island's picture

Tyler, What is GS trading desk position in regards to gold mining equities?  Are they buying?

I am now conflicted, I usually do the opposite of what GS recommends.  I see the miners as undervalued, i.e. International Tower Hill mining has 20mOz gold deposit and almost $100 million cash and they are at $3.67/share?  Give me a break.  ATAC is below $3/share, they were at $10 earlier this year.  Now GS says to buy 'em.  I am suspicious they will now go lower even after tax sale loss season ends. 

SheepDog-One's picture

Who cares about gold ETF's or gold stocks? If you want gold, then buy some gold.

Wolf-Avatar's picture

Gotta get y'r shiny on.          :-)

ArgentoFisico's picture


Italian gold&silverbugs on  >>>  argentofisico.blogspot.com

OliverTwist's picture

Ma senti un po ArgentoFisico: è vero che a Roma è difficile trovare dei posti affidabili dove puoi comprare l'oro/argento fisico?


Chester_McGoldsteez's picture

If you pick a well managed, non(minimal)-elitist controlled company, owning equity in a gold producing company is a good way to play the gold move , especially for person who is in a position where they dont have much cash to invest with. with these stock prices where they are, i think its pretty attractive, and definitely not a bad way to get in on the action, so long as you have the stomach to sit through the manipulation until the real crisis happens. Even though most sheeple cant sit through the short term volatility and usually get shaken out. 

Shineola's picture

Then you get to pay your taxes on any imagined gains. Baaaa

Chester_McGoldsteez's picture

Easssssy troll. Physical is obviously king, but the huge gains i'v made still are unseen since im not stupid enough to sell my holdings, since the real value still has a long way to rise. So even though my value is up, my cash is still the same, day to day, im in no different position than I was before i bought physical. Whereas now i'v collected dividends on gold producing stocks. Im not advocating stocks to everyone, you have to know what you're doing. Since you were quick to brush it off, im sure you don't which is fine, but its Just another way to get on the game, while taking a little extra cash to play with. But by all means, Baaaa all you want.

Shineola's picture

I'm sorry sir. I did not mean to offend you. Sheeple buy paper not gold.

jekyll island's picture


There are two types of posters who respond to articles about mining companies on ZH.  The apocalypse types who advocate possession of PMs only and those who probably have a good position in PMs and are now looking to leverage the miners for better returns.  Looking at the dozens of companies that had 1,000% returns or more during the last two minibull markets, I want some exposure to those kind of gains, which are usually in the junior miners.  Nothing feels better than hitting a home run: tripling the initial investment, getting shares of a spin out company and using profits to buy more gold.  Some posters on this board don't understand that process, but to each his own.  I personally think the charts indicate a distortion in the mining sector which will correct sharply to the upside as gold continues to assert itself as money.  I agree with you about being patient, this is one area where you have to be on board before the train leaves the station, even if that means short term loss as you build a position.  GLTA. 

XitSam's picture

"If you pick ..."

Well, that's the problem isn't it. I don't know these people and company histories, don't have the time to find out and track them and make sure the press releases are the truth. Right now I'm all about wealth preservation.

Chester_McGoldsteez's picture

Alright, well i made the comment from a perspective of someone like myself, who takes the time to look into their investments, how companies are run etc. Now in no way am i saying that its possible to get a 100% clear picture of a companies managment, just like anything else in life, but I will say its not impossible to separate the complete shit companies from ones who are well run, and make money. If you do your homework that is. Again, physical is king, I was simply saying for those who are looking to get the absolute most out of the gold run, and are willing to put in the work and do their homework, its just another option. 

Shineola's picture

OK, then! We've got that all cleared up. Drop by the bunker anytime. :)

Bring the Gold's picture

Hey Chester what do you think of Chesapeake and Pretium? I'm liking both of these plays my only concern is energy inputs going nuts at some point. It seems the slide into recession when oil hits a certain price tends to cap it as use drops when oil hits a certain price, whereas gold has moved up steadily since 2008. Most of the majors are pwned by blue bloods and I shy away from that. I like millions of ounces in the ground and more to be found. I also have some silver plays, but that's for a different post. One other gold play some may like is Sandstorm Resources as its a royalty play so they get even more of the upside exposure with fixed prices for the gold they get.

jekyll island's picture

I have been following Pretium for a while, I like it a lot, I like it a lot better under $9/share. 

Chesapeake is too leveraged for me, look at Africa Oil Corp. 

I have Sandstorm metals and energy, am waiting for Sandstorm Gold to fall below $1/share, looks really good at that price.

TheGardener's picture

You either buy physical , or you become a shareholder.

In the latter case, according to Davila, it doesn't matter
whether you are ruled by a few chairman or a politburo.

vipobviously's picture


...and if you want to put your head on the choping block and hope the guillotine does'nt fall, buy etf's/gld

blindfaith's picture

just got a call from znbc, your apperance has been cancelled.


vipobviously's picture

but...but...but..  my head is still attached to my torso, i thought that was the only requirement, along with being able to read the "party line" from the teleprompter

....have my people call znbc and reschedule please


jekyll island's picture

I do. The math is quite compelling.  The market cap of the entire gold mining industry is less than Wal-Mart's.  When confidence is lost in fiat currency, it will be nearly impossible to buy physical PM's, they just won't be available.  What's left?  Mining stocks.  What will happen when a couple of trillion dollars comes into a market that is valued less than $200 billion.  That is the definition of a parabolic move. 

DormRoom's picture

highly leveraged gold collateral trade collapses, then gold prices will collapse.

Spitzer's picture

when the comex defaults, the paper price will crash to the low 100's. Meanwhile, the holders of physical gold will be holding the most valuable objects on earth.

Bring the Gold's picture

And for those who can't get physical (the majority) a tried and true method of exposure - buying the miners - will see a moonshot that is truly breathtaking.

cossack55's picture


Counterparty risk, anyone?

Bring the Gold's picture

Well if you are a citizen and hold your gold in an NWO controlled country, or one with a dictator, then confiscation is also a risk. There is no such thing as a lack of counterparty risk on this planet. People who think otherwise are delusional. Can you limit it by living off the grid and burying your loot? Yes, you can limit, but never truly remove counterparty risk in the form of the strongman whether governmental or non-partisan thug. The greatest illusion of all is perfect safety.

TheGardener's picture

But goldbugs are supposed to be true reactionaries defending
a lost post. You can't possibly win, but you chose to fight.

SilverIsKing's picture

There's no time like the present to buy up physical and miners at artificially distressed prices. Woulda, shoulda, coulda will be on the lips of those who sat idly by when then could have been taking advantage of the opportunity of a lifetime.

cossack55's picture

IMHO, gold is a store/reflection of sovereign wealth.  When the nation in which you reside loses its sovereingty, guess who else does.

vipobviously's picture

Not in America cossack, chisholm v. georgia

Our soverienty is not granted by the state, but in all fairness not recognized by  such w/out a legal battle