Let me start off by saying that I am not a gold bug. To me, it is comical to think that when all else fails, you will be able to pay for what you need with gold.
If you want to test this theory, go out and try to pay for your next dinner at a restaurant with a small piece of gold or silver. It most likely will not be accepted as payment for your meal. So if they will not take it in good times, why would they all of a sudden take it in bad times? Kind of insane. That said, I do believe that gold has a value, and it is vaguely reflected in the amount of fear that exists in the market.
As of late 2013, I am having a hard time finding much to buy. My Aspect Large Cap Value portfolio has a large percentage of cash. It’s not that I am particularly bearish, it’s just that I like to buy stocks when they are cheap and sell them when they hit my target prices (as they are doing more and more these days.)
Market Vectors Gold Miners ETF
So taking all of this into consideration, when I look at the paucity of choices in terms of large-cap stocks, the depressed price of gold and the downright awful performance of gold mining shares, I see a theme. The combination of a lack of fear and a very favorable stock market has created an opportunity in beaten-down gold mining shares.
I suppose that one could buy physical bullion or gold-backed ETFs like SPDR Gold Shares (GLD), but there are a few interesting reasons why gold mining shares are preferable, in my view.
First off, physical gold and bullion-backed ETFs are taxed as “collectibles.” That means investors could face taxes as high as 28% on gains. Long-term gains on equities are taxed at a 20% rate.
Second of all, gold does not pay a dividend while some mining companies do. Mining shares also have potentially more upside leverage if the price of the metal decides to rise, especially from these levels. So rather than paying massive spreads, unfavorable taxes and dealing with storage and carrying costs, I think that it may be better to look at large-cap gold miners that pay a dividend as a long-term way to invest in a rising gold price over time.
The decline in gold and gold mining shares may not be over. Depending on what you read, gold production costs are at or slightly above the current price of gold. Physical demand remains high. Governments around the world continue to debase their currencies but all of this could take a while to play out. So I look at it like a sort of call option on fear, which is very low right now. It is inevitable that the world, and therefore gold, will have its ups and downs, so I am buying large-cap gold miners and waiting for the pendulum to swing in the other direction.
DISCLAIMER: The investments discussed are held in client accounts as of November 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Covestor Limited does not provide tax advice. Please consult your tax adviser for such guidance. Past performance is no guarantee of future results.