Gold: To Have or Not?

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In the greater wash of investing, gold bugs have always been vastly outnumbered, and easily succumb to the loss of one-time friends who will happily and savagely flock to hotter subsectors in the markets. Measured over the past five years, which covers the majority - so far - of the rising supercycle in commodities (if that's what it is), the performance of listed old order gold stocks has been relatively muted.

For many years before the global resources sector turned decisively north in early 2002, listed resources stocks were generally regarded as highly risky trading instruments during brief dead-cat-bounce rallies in commodity prices. In North American markets, Alcoa, the diversified aluminium stock, was one of the favourite bets, as a proxy for positive economy sensitivities. Freeport-McMoRan, the world's biggest listed copper digger, also ranked as a handy bet for the adventurous.

And then, of course, there were the gold names - well known and historic Newmont, and the immaculately groomed Toronto-based Barrick. Thanks to the long standing belief - certainly to some, no matter how far on the fringe - that gold is more that simply a metal with limited intrinsic use beyond the hedonistic and dental, some of the faithful slogged it out for the gold stocks...

This time around, there is increasing evidence that gold names, and some of the old names, like Alcoa and Freeport-McMorRan, are facing the possibility of a permanent loss of status in global resources markets. It's all about cash, bulk and pricing power. Gold miners have long shown a tendency to be more articulate in the spoken and written word than in the ability to operate gold mines that produce truly thunderous cash returns. So convincing has the spoken word been that listed gold stocks continue to rank as overpriced, relative to other mining stocks, when measured on ratios such as price-to-earnings and/or price-to-cash flow.

In the greater wash of investing, gold bugs have always been vastly outnumbered, and easily succumb to the loss of one-time friends who will happily and savagely flock to hotter subsectors in the markets. Measured over the past five years, which covers the majority - so far - of the rising supercycle in commodities (if that's what it is), the performance of listed old order gold stocks has been relatively muted.

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