Should You Invest in Gold Stocks or Gold?

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One of the questions perennial confronting investors looking to invest in gold is whether to invest in physical gold or gold miners who actually produce the gold.

Generally investing is physical gold is better idea than buying gold stocks. Since buying and holding physical gold nowadays involves many problems such as the possibility of theft from one’s home, most investors choose an ETF that is backed up actual gold held in secure locations. The SPDR Gold Shares ETF (GLD) is one such ETF that is most preferred by investors. It is not a wise strategy to invest in gold mining stocks. This is due to many reasons including high volatility, low or no dividend payments, consistency in earnings, etc. Gold mining involves not just production but also exploration for discovery of new sources of the yellow metal. Exploration by definition involves high risk and many companies have collapsed in the past such as the infamous Bre-X of Canada. Mark Twain’s famous comment “A mine is a hole in the ground with a liar standing next to it” cannot be ignored before investing in gold miners. When gold prices rose year-after-year in the past few years before the recent downtrend, gold stocks did not keep up and in fact lagged the growth in gold prices. The following chart shows the difference in the long-term returns of the SPDR Gold Shares ETF (GLD) and Market Vectors Gold Miners ETF (GDX) which can be considered as proxy for gold mining stocks:

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GDX-vs-GLD

Source: Yahoo Finance

Here is another proof showing the performance of South African gold miners and gold price. South Africa is one of the largest producers of gold in the world. Hence the return of South African mining stocks against gold prices is highly relevant to investors.

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FTSE-JSE-Gold-Index-vs-Gold-Proce

Source: Angles and Perspectives, Q2, 2013,  the Quarterly Newsletter of PSG Asset Management

The blue line shows the performance of FTSE/JSE Gold Index which tracks the gold mining companies listed on the South African market.

From the report in the PSG Asset Management newsletter:

In mid-April the gold price fell 15% in three days.

At $1,322 the gold price was 31% below its high of $1,921 reached in September 2011. Some market commentators therefore believe gold now finds itself in a bear market.

The decline in the gold price resulted in a precipitous decline in the share prices of South African-listed gold stocks. At the time of writing, the FTSE/JSE Gold Index has endured a 37% year-to-date decline, following a 20% decline in 2012.

Gold shares have been a very poor investment for some time and the Gold Index is at the same level it was at in 2001.

What makes this lack of return all the more shocking is that over this period of more than 11 years the gold price has increased five times in dollars and more than four and a half times in rand terms. The FTSE/JSE All Share Index has tripled
over the same period.

Disclosure: No Positions

Update – 3/29/14:

Click to enlarge

Gold Mine Stocks vs Gold Price

Since 2004, gold mining stocks traded on South Africa’s JSE have consistently falled while gold price has for the most part gone up.

Source: Gold and platinum mines: ‘Eating sardines’ or ‘trading sardines’?, Allan Gray

Three Differences Between MSCI and FTSE Indices

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Index providers MSCI and FTSE have launched many indices over the years. Hundreds of ETF providers and other companies use these indices to benchmark the performance of their products. Some use the MSCI while others use the FTSE. For example, the iShares Emerging Markets ETF (EEM) tracks the performance of the MSCI Emerging Markets Index. The Vanguard FTSE Emerging Markets ETF (VWO), on the other hand, tracks the return of FTSE Emerging Transition Index.

Late last year, Vanguard decided to replace benchmark indices from MSCI with FTSE indices as for their ETF products. However iShares decided to stay with MSCI.

What are some of the differences between the MSCI and FTSE indices?

While there are many differences between the indices in terms of holdings, countries, sectors and style, in this article let me list three differences.

1. The MSCI EAFE Index (Europe, Australasia, Far East) and the FTSE Developed Ex North America Index have a greater than 10% difference in holdings.

2. The two index providers also differ in terms of country allocations in their emerging market indices. For example, MSCI considers South Korea as an emerging country and includes it in the emerging market index. But FTSE considers South Korea as a developed country and excludes it from the index.

3. MSCI excludes Pakistan and United Arab Emirates(UAE) from its emerging index since they are assigned the frontier market statuses. But FTSE includes them in its Emerging Index.

Update June 2017: MSCI added Pakistan to the MSCI Emerging Markets Index

The key takeaway from this post is that investors have to thoroughly review the benchmark index that an ETF tracks before deciding to investing in that ETF.

Source: MSCI versus FTSE: Why they’re not the same, Canadian Investment Review

Related:

Disclosure: No Positions

The Top 50 Global Pharma Companies 2013

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The Pharmaceutical Executive magazine published its annual ranking of the Top 50 Pharma Companies Worldwide based on sales earlier this month. New York -based Pfizer(PFE) was topped the list with a sales of over $47.4 billion in 2012.

The Top 50 Global Pharma Companies are listed in the tables below:

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1-Part-Top-50-Pharma-Companies-2013

2-Part-Top-50-Pharma-Companies-2013

Source: Pharmaceutical Executive

Here are a few observations:

  • Swiss drug giant Novartis(NVS) came in at number two with sales of over $45.0 billion.
  • Among the top 10, five are European pharma companies including Novartis, Sanofi (SNY), Roche (RHHBY), GlaxoSmithkline(GSK), and Astrazeneca (AZN).
  • Teva (TEVA) of Israel, the world’s largest generic maker had revenues of sales of over $17.0 billion and took the 11th spot. Teva’s growth so far has been astonishing and is now within striking distance of taking the 10th rank from Eli Lilly(LLY).
  • For the first time, Indian pharma maker Ranbaxy Laboratories appears in this top 50 list. Ranbaxy is majority-owned by Daiichi Sankyo of Japan.
  • For the first time in more than 50 years, year-on-year growth contracted in the U.S. market due to patent expiration of blockbusters such as Plavix, Seroquel, Lipitor, and Zyprexa and increased scrutiny of pricing by payers and regulatory approvals.
  • Due to the ongoing recession, growth in Europe was flat.
  • Fresenius is a leader in the dialysis market. Its Medical Care division trades on the NYSE under the ticker FMS.

Disclosure: No Positions

Also checkout: The Top 50 Global Pharma Companies 2014

Update:

Download: The Top 50 Global Pharma Companies 2012 (in pdf)

Knowledge is Power: Costs Matter, Cash Machines and Purity Concerns Edition

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‘Keep calm and carry on’ as FTSE tumbles 2% (CityWire)

‘We are, in economic terms, all Japanese’: Paul Krugman (Financial Post)

Is this the end of Japan’s bull market? (MoneyWeek)

Avoiding stocks? (Fidelity)

Does Behavioral Investing Make Sense Anymore? (AllianceBernstein Blog)

Costs matter: Are fund investors voting with their feet? (Vanguard)

Purity Concerns: German Beer Brewers Foaming over Fracking (Der Spiegel)

Cash Machines  (Canadian Business)

Goa-Church

The Church of St. Francis of Assisi, Goa, India
Built in 1661 by the Portuguese

Is Market Timing A Good Investment Strategy?

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Timing the market is not a good idea for most investors. Following this strategy is especially detrimental to long-term investors. Short-term investors also should avoid this strategy since even shorter time periods timing the market usually leads to lower returns. Investors holding equities for less than five years can be considered as short-term investors.

Proponents of this theory would argue that this is a great concept to follow and that buy-and-hold does not work anymore. With things like algorithms-based trading, high-frequency trading, high number of hedge funds in existence,  never-ending macro-economic crises, etc. it would seem that buying and selling at the market bottoms and peaks may be the best way to make money in this market. For example, supporters of this theory may support their case with a chart like the one below:

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SP500-Inflection-Points

Source: Guide to the Markets, 2Q 2013, JP Morgan Asset Management

Though the chart looks pretty, in reality it is impossible for any investor to perfectly identify the market tops or bottoms and trade accordingly. In fact, majority of the investors missed the current bull market that started from early 2009 at the peak of the financial crisis.

Many research studies have proven that market timing does not work. Here is the  result of a new study by Fidelity, UK:

Analysis by fund managers Fidelity found that if you invested £10,000 across all FTSE companies over the past 15 years and just left it there, you would have £19,610 today.

But if you missed the best ten days trying to second-guess the rises and falls you would have £10,611. If you missed the best 40 days you would have just £3,554 — cutting your initial outlay by more than half.

One of the best performing equity income fund over the past 20 years in the UK is the £14 billion Invesco Perpetual High Income fund run by fund manager Neil Woodford. This fund holds high-quality dividend paying companies. One of the reasons for the Neil’s excellent consistent performance can be attributed to the fact that the fund’s major holdings have not changed much in the past 10 years.  Some of the top holdings in the fund include AstraZeneca PLC (AZN),GlaxoSmithKline plc (GSK),Reynolds American Inc. (RAI) and British American Tobacco plc (BTI). The fund is up 32.3% in 1 year and 51.4% in 5 years in the local market.

Source: The Footsie’s had a stellar year, but will the great share boom turn to bust?, This is Money, UK

Disclosure: No Positions