Newsletter – January / February 2015 – Gold stocks vs Gold bullion: What’s the difference?


Gold stocks vs Gold bullion: What’s the difference?

I first wrote on the topic of the difference between investing in gold bullion and gold stocks in 2006 (CastleMoore Investment News Apr- May 2006). With the high volatility – both up and down – and the attention all things gold is getting of late, and will get in the coming months, it’s time to refresh things.

Without a doubt there are meaningful differences between physical gold and gold stocks, the most relevant being their intrinsic worth and price behaviour. The conventional thought is that they move in unison, that they are virtually the same thing. This is just not the case. Though they have a high degree of long term correlation they are not the same thing and the difference matters to investors.

Gold bullion is valued each day by world markets, much like oil, grains, unleaded gasoline, or one of my vices, cocoa. All are of course priced in US dollars. All of them are base or essential, and are pure physical items. Despite often being lumped in with the general commodity arena, as I just have, and as is commonplace, gold is not a commodity: it’s a currency. Sure there are some industrial applications but by and large it is a store of value, one that is 6000 years old and still running. Unlike a gold stock, bullion is not surrounded by so many other particular or company-specific inputs. Its movements are more pure even if they are misunderstood or perplexing. A quick look at this long term chart of gold bullion (black) and Barrick Gold (orange) shows that from mid-1990 through to late 2011 it paid to own the stock. Even considering the drop off in the last couple of years, comparatively, gold bullion has a nice positive return where gold stocks now show a loss.

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