Gold Bullion Or Gold Shares?

Posted by Julian D. W. Philips

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Is it Better To Buy Gold Bullion Or Gold Shares?

This is a snippet from the Gold Forecaster. The newsletter that covers all pertinent factors affecting the gold price [with a 95% accuracy rate].-

Global equity markets have changed over the last three years, investor capacities and capabilities have changed as have interest rate patterns.   This makes it incumbent upon investors to re-examine this question from the ground up.

The value of Dividend Yields

In the days of yesteryear, long-term investors bought shares because of growth potential and in particular for the income they would earn from shares and its growth.   The share price would then focus on dividends and potential dividends rising or falling in line with such growth or lack thereof.    Capital appreciation would follow.   Present and future Dividend Yield was usually tempered [as was the share price] in the booms and busts, by relating it to the average 5 to 10 year fixed interest rate yield.   This was because one had to ask, what would the advantage be in investing in risky equities, when one had the benefit of risk-free fixed interest securities.   The potential of the equity shares could then be related to the state of the economy insofar as it related to interest rates.

We now maintain that such value assessments should come out from yesteryear and find their place in today’s portfolios.   With the baby boomer generation reaching retirement now, their Pension funds have to switch to paying out regular amounts to this group, while the current far smaller group of future pensioners are not contributing sufficient amounts to these funds, to allow their payments to service this growing bulge of pensioners now retiring.  The shortfall will have to come from the income stream of investments.

Earnings don’t Count

Then the optimism of the early eighties grew and a culture of earnings don’t count came onto the scene.   The workforce contributions to future pensions was far more than enough to service existing pensioners and still contribute to the capital for investment into the funds.   This allowed institutional investors to ignore a clear income stream to investors and to focus entirely on capital growth reflecting the growing size of the investment.   This assumed that share prices would reflect this growth and make any income stream irrelevant.   Investors have bought into this and did so right through the summer days of the markets from the early eighties to 2007.   In many, many cases this led to price earnings ratios to rise to well above 30 times. 

If we refer back to the Earnings concept, this meant that the company’s share price was discounting 30 years worth of earnings a very rosy view of the future and potential growth.   Ah, you may well counter, the value of each share would rise higher than any such concept, so would justify such a view.   And if we lived in a world where summer was perpetual, this would be true.   But the winter of August 2007 changed all that.

We now need a share for all seasons and that brings us back to scene where shares should be bought that will do well in bad days and grow in value [followed by price], in the dark days.   We come back to not just the sound concept of ‘total return’ but how to benefit from a growing income stream that leads to share price growth, making ‘total return’.

Investor failure

In 2007 the quality of good companies was sound and measurable, but even those share prices tumbled alongside most markets, Why?   Share owners found the need to liquidate portfolios to cover cash gaps elsewhere.   Leveraged markets came under the most pressure as bank loans became harder to keep and prices fell across the board forcing more liquidation.   Prime asset such as the housing markets were the focal point of price collapses.   Bear in mind the replacement costs of those houses did not fall.   All these prices fell because of investor failure brought on by credit failure, not because value fell away from good companies.   And such investor failure and potential investor failure has not gone away.   Should we now lurch into a double-dip recession it will hammer values once again!

Please note that equities as a class of investment fell right across the board including gold shares after August 2007.   The gold price was rising, but investors did not have the capacity to ensure gold mining share prices would rise.   Yes, gold Exchange Traded Fund share prices rose alongside the gold price, but that was because there was no corporate risk between the gold price and those shares.

Shares that will survive such a winter and whose price will grow are out there and are in the gold market, at the right price.

Shares ‘for all seasons’ are out there

In short, good shares that should be in a portfolio have to pay for their keep.   [We have our own favorites in the Gold Forecaster newsletter we issue on a weekly basis.]   We will say now that that excludes a large number of sound, large companies that don’t put investor interests and requirements first.   And it is those companies that do badly when winter sets in.

Gold mining equities ‘feel’ only the average gold price over its entire financial year.   Yes, they tend to discount the gold price during that year, even ahead of the average gold price.   Now that there will be a greater emphasis placed on dividend streams, only when a company decides its profit distribution policies at the end of its financial year will the investor taste any benefit.  These can be greater than the gold price, as certain select gold mining company share prices can outrun the gold price.   So the emphasis on choosing well cannot be stressed enough.   It starts with defining just what you want from the gold share investment.

The benefits of gold bullion
In many investors’ minds gold bullion is the only investment in extreme times, because of its portability, un-printability, etc.   It will be ‘the ultimate bubble’ in the days to come, as George Soros said recently.   But there are several categories that gold bullion fits into before that.

  • As a portfolio diversifier.
  • As a ‘counter to swings’… in all currencies.
  • As a corporate-risk free investment.
  • As a thermometer-like measure of the state of the global economy.
  • Bullion ‘feels’ the rise and fall in the gold price instantly.

In each of these roles it can serve investors well as seen since 1999.   For those who amazingly cling to the idea that it gives no [income return] we point to its exceptional ‘total return’ in that period when it rose from around $275 to today’s $1,125.

Its one disadvantage is that it is vulnerable to government interference and confiscation.   Gold miming companies are vulnerable to government nationalization and taxation.   In rare situational cases gold bullion can escape such government interference.  [Contact us direct for more information on this ]

Which shares and what qualities do the right gold shares have?
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2010 gold prices forecast. For Subscribers only. We are in the process of forecasting prices in 2010 in – Chinese retail demand – Indian retail demand – European retail and Institutional demand – U.S. retail demand  – The Gold Price itself.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter.  To subscribe, please visit

In Global Watch – The Gold Forecaster, we present the global picture as it relates to gold and while synthesising these factors to forecast the gold price.

The price of gold is an amalgam of diverse and changing influences. From different world urrencies to jewellery, from investors to speculators, from the U.S. to India, from Australia to Canada, from South Africa to Asia, the gold price is of interest to all. It cannot be seen in isolation as a metal, but must be understood as a Global Thermometer measuring monetary, political, and economic stability.

These factors do not merely add up to the price but interact -in sometimes irregular ways- to produce the gold price. For example, rising prices often lead consequently to rising demand, as the appetite for the metal grows. Its price may rise in one currency and simultaneously fall in another. The price of gold reacts sensitively to the overall level of global stability.

It is our task in this letter to track these different features, giving you both the Technical Analysis and the Fundamental features impacting the gold price each week. It is our goal to help you to understand and profit from this market, wherever you are on this globe. We welcome any input or observations you may have, which contribute to the enhancement of this service.