Cautionary Tale About Gold Stocks

Had you decided that gold was going up in 2005, and bought into some well-known gold producers, then your portfolio would have underperformed the metal itself. That's the context to a Globe Investor Market Blog post by David Berman that outlines the market risk of investing in gold shares. Granted that 2005 marked a high in gold shares, but the high points are also the popular times for any investment.

The cautionary tale therein is about Gammon Gold, a hard-luck producer whose stock price has actually declined 9.5% since mid-2005.

Yes, even if you had made a prescient bet on gold at the start of the remarkable five-year bull market in the precious metal, you would have nothing to show for your wisdom but a big headache. Rising gold prices are one thing; how much a company has in the ground and the cost at which they can get it out of the ground is another.

Of course, Gammon stands out as a sore thumb; the senior producers haven't had its ill luck. Its record, though, does indicate the need for diversification.

Had Berman picked the Amex Gold BUGS Index (HUI), he would have gotten a similar underperformance. At the close on March 31, 2005, the HUI was at 201.86. As of yesterday's close, it was at 406.95: the five-year gain was 101.6%. The London PM fix for gold on Mar. 31/05 was $427.45; yesterday's was $1,115.50. The five-year gain for physical gold was 161.0% in the same timeframe.

Of course, the finanical crisis intruded - but events like that do happen from time to time over the long term. Sadly for the gold shares, they have underperformed the metal itself over the last five years.