5 Typical Mistakes with Gold Investments

Axel Merk has published a new whitepaper entitled "Fools Gold: Five
Common Mistakes with Gold Investment" that deals with poor Gold investments decision or understanding.

5 investment advices are summarized below:

1. Gold Stocks Ain’t Gold - Gold mining stocks, on aggregate, have significantly underperformed the price of gold.
2.  There is Only One Real Thing - Other precious metals, including silver, may not perform as well as gold in times of economic duress.
3. Beware of Premium Over Spot - Make a note of the spot price of gold per Troy ounce, so that you can calculate the premium the dealer is asking for (be sure to include any delivery, administrative, insurance, or related fees) before making a final decision
4. Don’t Overlook the Expenses - Before you buy physical gold, you have to carefully consider the related storage and insurance costs.
5. Make Sure Gold is Really There -  If you buy a Gold ETF make sure to read the prospetus, and be wary of large amount of "unallocated gold", and the ability to lease gold.

The full report is available for download on Merk Funds website.

Rick Rule Sprott - Most Junior Gold Mining Stocks are Worthless

VisionVictory has a very interesting interview with Rick Rule of Sprott USA, where he discuses his outlook on gold and gold stocks, water, the stock market as a whole, the economy (US debt) and finally junior gold mining stocks.

This is that last part that is very important to investors. He explains that If you put together the 400 junior gold mining companies, in a good year they would lose 2 billion dollars, in a bad year 8 billions dollars. So he sees no value in this market, unless you are a very good stock picker as the top 10-15% will thrive, whereas 80% will go to their intrinsic value: 0. Rick expects this market (where you can be invested in via ETF such as GDXJ) will stay in a consolidation phase for around 18 months more, while the weaker players (the majority) go bankrupt.

FYI, Marc Faber has the same view on  junior gold mining stocks.

Watch the whole video, it's very informative.

Eric Sprott: Time to Buy Gold Stocks

A few weeks ago, I made the case for Gold Miners vs Gold bullion. This month, Eric Sprott published his monthly newsletter Market at Glance (September 2011) entitled "Gold Stocks: Ready, Set,…"

First, he makes the observation that since 2008, the HUI index has lagged the performance of Gold:

If you review the chart below, you’ll notice that while the gold price has almost doubled since early 2008, the HUI Index has appreciated by a mere 22% over the same period (see Chart A). If the HUI was justified at 500 in early ’08, it should surely be justified at 1,000 today, given the appreciation of the gold price over that time. So why have the equities lagged?

Then, he explains that the difference is due to investors gold price expectation that are as low as 1000 USD in 2014 (average expectations;:1340 USD per ounce) and the stock market being forward looking that would explain the performance difference between gold miners and gold bullion. However, the future markets say at different story with a 2013 gold price at 1909 USD.

Third, in 2008, Gold stocks are been hammered (some have gone bankrupt) following the sharp drop in the price of Gold, so investors may be wary of increase their Gold stock positions.

However, as recently as August 2011, the trend has changed. We have seen day where gold dropped and gold stock went (slightly) up. The price divergence is massive when bank stocks and compared to gold stocks (See chart comparing KBW bank index vs HUI gold index).



He carries on explaining that the current production price is 800 USD, and if Gold is 1800 instead of 1200, this would represent an increase of 150% in profit margin. He is amazed that – despite this new reality for gold producers - they are still finding opportunities in select gold and silver mining companies that can be purchased today at 2-3 times their 2-year-out forecasted cash flow and it would even become cheaper if Gold price continue to rise as Sprott Asset Management forecasts.

In conclusion, he believes the equities will offer more upside than the bullion over time and the prospects for gold stocks look extremely bright.

You can subscribe to Sprott Asset management's Market at Glance newsletter free of charge or download the PDF version.

Hong Kong Gold Mining Stocks and Gold ETFs

In the US, gold mining shares have underperformed gold bullion and we've talked this could be a good time to invest in gold miners based on the gold mining index to gold price ratio.

Today, I'll have a look at ways to invest in Gold on the Hong Kong stock market (hang seng) via Gold mining shares or Gold ETFs.

Here's a list of Gold mining companies listed in Hong Kong:

• 0246.HK:Real Gold Mining Limited
  
• 1051.HK: G-Resources Group Ltd
• 1194.HK:China Precious Metal Resources Holdings Co., Ltd
• 1818.HK:Zhaojin Mining Industry Co. Ltd
• 2099.HK:China Gold International Resources Corp Ltd
• 2899.HK:Zijin Mining Group Co., Ltd
• 3330.HK:Lingbao Gold Co., Ltd

Here's a list of Gold ETFs offered in Hong Kong:

• 2840.HK: SPDR GOLD TRUST Physical ETF that tracks the LocoLondon spot gold price (Similar to GLD in the US)
• 3081.HK: VALUE GOLD ETF Physical ETF that tracks the London Gold Market Fixing Price.

In Hong Kong, it is relatively easy to buy Physical bullion directly at the Bank or online with Wing Hang bank Gold passbook that allows you to ask for delivery of gold Maples or 5-tael gold bars. You can also be exposed to Gold bullion by buying the 2 ETF above, but there is no ETF specifically holding gold mining shares listed in Hong Kong or China such as GDX in the US, so to replicate that, you could build a portfolio with the 7 stocks mentioned above.

Let's have a look at the performance of those stocks over several years.

• 0246.HK:Real Gold Mining Limited

This company has been listed in 2009, has a P/E of 7.9 and a market cap of 7.9 billion HKD according to Yahoo. Unfortunately, this data is irrelevant since the stock has been suspended since May 2011 (See the flat line in the chart?) due to potential accounting fraud.

• 1051.HK: G-Resources Group Ltd

The chart at Yahoo is messed up, so I used Bloomberg with this company which has a negative P/E and a market cap of 9.45 billion HKD according to Yahoo. It has been listed in 2006 and has participated to the Chinese bubble, but since then it has performed poorly.

• 1194.HK:China Precious Metal Resources Holdings Co., Ltd

This company has a P/E of 170 and a market cap of 5.10 billion HKD. It has been listed since 2004 and has not performed as well as Gold over that period of time.

• 1818.HK:Zhaojin Mining Industry Co. Ltd

Another Bloomberg chart as yahoo does not handle stock splits very well. This is the star of gold mining stocks. It has massively outperformed Gold (GLD is in Green in the above chart). It has a P/E of 36.42 and a market cap of 15.47 billion HKD.

• 2099.HK:China Gold International Resources Corp Ltd

This company has only be re-listed on December 2010, so the chart is only from December 2010 to September 2011 and not so relevant. Nevertheless, the stock has underperformed gold. Its P/E is 34.54 and market cap 14.75 billion HKD.

• 2899.HK:Zijin Mining Group Co., Ltd

Zijing Mining has a P/E of 13.42 and 21.03 billion HKD market capitalization. It has not done anything since 2004 (even a bit down), even though Gold has more than triple since then. The recent drop is partly due to a pollution issue with one of its mines.

• 3330.HK:Lingbao Gold Co., Ltd

Lingboa gold has not returned anything for those who hold it between 2004 and 2011, although the price of gold skyrocketed. It has a P/E of 10.34 and a market cap of 1.25 billion HKD making it the smallest company in this list.

Only 1 out of 7 stock has outperformed Gold (Zhaojin Mining Industry) over the years, the others have poorly performed either for some valid reasons or because they are being ignored by the market.

To learn more about Gold mining stocks in Hong Kong, I recommend you read the report "Gold price rise may speed up China’s Precious Metals Industry Report in 2H11."

New Jim Rogers' Index: Rogers Global Resources Equity Index (RGREI)

Jim Rogers has been chosen by CITIC Group (China) and Banco Bilbao Vizcaya Argentaria (BBVA) to pick companies operating in the resources sectors to create a new index.

This new index called the Rogers Global Resources Equity Index (RGREI) will include companies in agriculture, alternative energy, forestry, energy and metals with a total of 200 stocks.

BBVA head of equities, Eugene Lee, said there is already an institutional base of clients in Latin America with a strong interest in investing in a commodity index like the Rogers Global Resources Equity Index.

Rogers has his own index fund, the Rogers International Commodities Index (RICI) based on commodities futures (not companies) currently tracked by RJA ETF (in the US) and Barclays Global Commodities Delta Fund (in Asia).