Eveillard on Gold and Gold Stocks in Current Market

With my previous post mentioning gold, I've come across this Bloomberg report on value manager Jean-Marie Eveillard and his fund holding gold bullion and gold stocks. He's not expecting the Wall Street mess to become a disaster, and he's quoted as saying the steps being taken are "probably helpful."

But he also notes that gold is a type of insurance. And, as an American, it pains me to see Eveillard correctly point out that the US seems unwilling to endure the "creative destruction" needed to correct the current situation:

"The Asian solution would mean you correct the excesses and it's very painful for a year or two or three, or the Japanese solution is stagnation '' Eveillard said. "They don't want the South Korean solution or the Japanese solution, so they come up with their own reflation.

"Financing the larger deficit by "printing more money'' will drive inflation higher, increasing gold's appeal as a safe-haven asset and an alternative currency, Eveillard said.

On gold, I'll add two things. First is that I don't own gold or gold mining stocks in the portfolio. And second is that anyone thinking about gold should understand the difference between gold bullion and a gold mining company's stock.

Comments

[Johnny]

Care to dwell on the differences between the 2?

[David]

I saw that interview yesterday and was wondering if you'd mention it, John. I know you've talked about Eveillard in the past and his thoughts on gold were quite interesting.

If I can take a quick stab at Johnny's comment/question:

Gold bullion or coins are usually seen as a preserver of purchasing power (rather than a true investment, which should offer some sort of added dividend over time). If you own precious metal coins (or a paper substitute, such as an ETF), you are basically keeping a part of your capital/wealth in non-fiat currencies, as a hedge against inflation.

Mining shares are more of a speculation tied to the prospects of the gold mining industry, or you might find some as an out and out investment (if you can properly value them).

As with any resource sector company, the share price is tied not only to resource price (in this case, the price of gold) but also to that specific company's cost structure, management, project portfolio, and growth prospects.

Each mining company carries its own unique risk/reward profile, and an individual company may flourish or flounder, even while prices for the metal itself may go in the opposite direction.

[John]

I second David's comments (and thanks for providing your answer). Gold mining stocks can do the same as the metal, or better or worse. And one mining stock can do better than another mining stock.