Friday, February 5, 2010

Today's Commodity Markets: Stocks vs. Commodities Ownership Per Se

Based on current prices, palladium-- the "junkier" platinum group metal (vs. platinum itself) is off 11% since Wednesday's close (less than 2 full trading days; it being Friday AM now). Gold is off 5%, platinum off 6%, and silver off 7 1/2%.

On a 2-year basis, the GDX index of gold miners' stocks is off about 17%, whereas GLD (passive ownership of the metal) is up about 19%. On a short-term basis, gold mining stocks are off their peaks much more than gold itself.

On a 5-year basis, GDX is up about 5% (1% a year, underperforming money in the bank), whereas GLD is up about 140%.

In other words, the focus at EBR on owning the metal rather than the stocks of the producers has worked. So long as mining stocks are priced insanely, with no requirement by investors that they actually return large dividends to shareholders as Homestake Mines did in the 1930s, then the basic economic argument for gold ownership continues. This argument is simple. It is that gold is becoming scarcer and thus more expensive in real terms to produce. Environmental concerns enhance that expense. Thus, one of the reasons for projecting increasing gold prices is the difficulty of creating refined gold. However, that point is an argument against owning a mining company.

GLD, GTU, physical ownership of gold, etc. They are all variations on a theme. Most investors have been trained to own gold in the ground (stock market gold) rather than the thing itself.

This concept is also true for silver, platinum, and the like. Should stock prices fall relative to the price of the commodity, the investment case could shift to favor ownership of the stock rather than the commodity itself. For now, ownership of a durable commodity such as a metal of course does not protect one from booms that turn into busts or simple changes in "sentiment", but it is the anti-AIG, anti-Fannie Mae mode of investing. So long as the fund or other caretaker holds the metal it says it holds, or your bank vault is not cleaned out or the like, you own a thing that simply is what it is when you own the commodity rather than a minority share of a corporation that may never make a dime even if it churns out the metal as promised.

Commodities bears are growling loudly and scarily. Are these bears nothing but paper tigers?

I have no idea, but . . .

During sharp market moves, investors who own commodities outright, without margin debt, can sleep well so long as they can live their lives if the commodities drop sharply in price. A severe drop in price, which tends to reverse if the commodity is an essential one, may however bankrupt individual companies, but the commodity itself cannot suffer that fate. It survives to "fight" another day. Ownership of a common stock of a metals miner is mostly for suckers.

Copyright (C) Long Lake LLC 2010

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