Bullion or Mining Stocks?

All of us Gold Bugs wonder how best to allocate resources.  It's no secret that mining stocks have proved to be a MAJOR disappointment for several years. 

Over the last two years, the table below demonstrates how poorly mining stocks have performed relative to the metal itself.  The HUI Gold Bugs Index,is the key benchmark for publicly traded Gold and Silver miners.

Time Frame                  HUI Peak                      Gold Peak
March, 2008                   515                               $1,025
December, 2009             510                               $1.225
June, 2010                      500                               $1,250

As is clear, mining stocks have failed to keep pace with the metal itself in a very major way.

The basic argument for investing in mining companies, as opposed to bullion, is that they have leverage relative to the metal.  This has not been the case in recent years.  In fact, despite accelerating earnings, they've performed rather dismally.

Gold, in my opinion, is, for the time being, the better bet.  Its use as an alternative currency during a period of extreme worldwide monetary debasement is proving far more valuable.  Mining stocks are still equities and subject to the extremely bearish winds now in motion for the stock market.  There will be better opportunities to re-enter.

If we are entering another deflation scare, it's important to be aware that even the metal itself may be subject to some temporary pressure.  There will probably be a better entry point for the metal itself, although, at this time, its chart still looks VERY constructive. 

Federal Reserve chairman Ben Bernanke is a student of the Great Depression and is very aware of the relationships between money supply growth, economic activity and asset performance.  Undoubtedly, as this new market smash fully expresses itself, the FED will be forced to undertake even more drastic measures to re-liquify the economy than it already has.  Bernanke earned the nickname "Helicopter Ben" for proclaiming, on numerous occasions, that he would be prepared to drop money out of helicopters if that's what it took to get money circulating again.  He may have to make good on that one.

In its desperation, the FED wil probably over shoot and, in so doing, sow the seeds of hyper-inflation.  Then, all the ingredients for Gold to achieve vastly higher levels will be in place.

This is one of the reasons that successful investing is so damn tough.  You can be completely correct in a forecast and STILL lose money.  All of us precious metals mining stock investors have stood back, watched the bullion advance and have been totally unable to cash in.

Extreme caution continues to be warranted here.

Marko's Take