Why Gold Is Better Than Gold Mining Stocks

Gold is always a better investment than gold mining companies. This is because unlike physical gold gold miners involve more risk. For example, miners are exploration firms who do no know if and how much gold can be extracted from the ground. Even if gold is mined efficiently prices of the precious metal can be volatile. And of course mining operations are not cheap in any way either. I have noted these points before on this blog and have always suggested that investors are better off going with gold than gold miners.

I recently came across an article at MoneyWeek that discussed this very topic. The following is an excerpt from the piece:

This first chart shows the relative performance of the two since 2000 overlaid. Gold is in gold and the miners are in dark blue.

You can see that over the last 18 years gold has gone from below $300 an ounce to $1,350, or thereabouts, yesterday. The HUI has gone from just below $75 to $182. So the HUI is up around 150%, while gold is up around 350%.

In terms of relative performance, in short, gold has annihilated the miners.

Miners are supposed to provide leverage to the gold price. That is why one speculates in them. If gold rises, say, 20% or 30%, you should be looking at at least a 50% gain in the mining company.

After all, you are taking on the additional risk of buying a mining company – the risk of the competence of the management, the political risk, the operational risk – and the compensation for that risk is the reward of greater gains.

Except that palpably has not happened. You would have been far better off just buying the metal. Far less risk; far greater gain.

Source:Why gold is a better bet than gold miners by Dominic Frisby, MoneyWeek

The full article is worth a read for gold investors.

Related ETF:

  • SPDR® Gold Shares Trust (GLD)

Disclosure: No Positions

The Complete List of Foreign Stocks Trading on the NYSE and NYSE American Exchanges

The New York Stock Exchange(NYSE) and NYSE American Exchanges are home to not just American companies but also many foreign companies. According to NYSE data, there are 502 companies from 46 countries that are listed on these two exchanges as of March 31, 2018.

For investors looking to diversify and add foreign stocks to their portfolio, the following list of stocks offers a good starting point for further research:

Click on image to open pdf document

Source: NYSE

Download:

High-Speed Rail Network Map of Europe

The latest high-speed rail network map of Europe is shown in the map below:

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The high-speed rail network map of European Union is shown in the map below:

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Source: UIC

As the maps show many of the major European cities are already connected by high-speed rail. With many lines under construction and planned for future development, passengers will be able to travel between most European cities quickly and efficiently in the future.

Three Concentration Risks of the MSCI Emerging Markets Index

The MSCI Emerging Markets Index is one of the most popular indices that track emerging markets. The index gives exposure to represents 846 large and mid cap stocks from 24 emerging markets. Many products such as ETFs and mutual funds use this index as a benchmark. For example, the iShares MSCI Emerging Markets ETF(EEM) which has over $42.0 billion in assets tracks the performance of the index.

At a high-level the MSCI Emerging Markets Index seems to be well diversified since it has over 800 firms and 24 countries. However that is not the case. The index suffers from three concentration risks. They are country risk, sector risk and company risk. Much of the index performance is driven by a handful of companies in a few sectors from a few countries.

1. Country Risk: 

Though the index represents 24 countries allocation is not equally distributed among all the countries. About 60% of the allocation is assigned to just 3 countries – China, South Korea and Taiwan. So political uncertainties or economic issues in these countries will have larger impact on the index. So country risk is an important factor that emerging markets investors to have keep in mind.

2. Sector Risk:

The index also suffers from sector risk in that just two two cyclically growth oriented sectors dominate the index.Information Technology and Financials account for 52% of the index. Both these sectors are volatile sectors and go thru boom and bust cycles. So investors in ETFs such as EEM are more exposed to these sector than they may realize.

3. Company Risk:

Despite the index being made up of 846 firms, the top 10 alone account for 25% of the index. Of those 10 firms, 8 are from IT and the Financial sector. In addition, 5 stocks in the index have 20% of the weight. Hence these handful of firms have a much higher impact on the index performance than others. Any adverse or catastrophic problems at these firms will affect the index performance more.

The composition of the index in Feb, 2018 is shown below:

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Source: EM: A Cautionary Tale of Concentration by Michael J. LaBella, Legg Mason

The following chart shows the country and sector weights at the end of first quarter 2018:

Source: MSCI

The key takeaway for investors is that concentration risk is real. Investors have to look under the hood before assuming an ETF offers diversification. During the dot-com crash investors with heavy exposure to tech stocks got wiped out and during the most recent financial crisis, those with large concentrated allocations to real estate and financials lost heavily.

Related ETFs:

  • iShares MSCI Emerging Markets ETF (EEM)
  • Vanguard MSCI Emerging Markets ETF (VWO)

Disclosure: No Positions