Want Leverage to Gold and Silver? Avoid the Large Caps


"Over time, large-cap gold stocks do not outperform gold."

Days ago, I was watching Peter Schiff on Yahoo Tech Ticker. Normally, I find myself in agreement with Schiff. This time, however, I disagreed with his comments on the gold stocks. He was saying to buy GDX because the large-cap stocks were priced for a decline in gold. He also said the speculative juniors were going nowhere. These things may be true and play out in his favor over the coming months and years.

However, the reality is that, over time, large-cap gold stocks do not outperform gold. If you want leverage, the large caps are a terrible place to go. Steve Saville has a great commentary on this. Over time, large-cap miners struggle to replace reserves and grow production. The larger you are, the more new resources you have to find and the more cash intensive the business (exploration, extraction, production) becomes. While it is likely that the large caps will rise in the coming years, it is dangerous to assume they will outperform gold. That would be going against history.

Even the unhedged large caps can't outperform gold consistently, as the following chart shows. Aside from major bottoms in 2001 and late 2008, the HUI:Gold ratio has, basically, trended sideways or down.


However, note the recent leverage in both GDXJ and TGLDX (Tocqueville Gold Fund). If you want more consistent leverage, go with the juniors or John Hathaway's Fund. Avoid GDX altogether.

In regards to the juniors, our 25-stock index has performed quite well nominally and in real terms. The following two charts show the performance in real terms.



I am not sure which juniors Peter Schiff is referring to, but the juniors we follow have performed very well. It is clear that juniors are the place to be if you want growth and leverage. The juniors, when measured against gold, have recovered significantly, while the HUI (GDX) has recovered less than half of its losses against gold. Also, we can see that, when measured against the HUI, the juniors have made a major breakout.

Part of the reason for junior outperformance is the increasing number of takeovers. This comes as no surprise, as many analysts have expected this. Majors are taking over intermediates and large juniors, while large juniors are taking over smaller juniors. It is happening across the spectrum. Simply put, it is easier and more cost effective for a company to grow via acquisition than via in house exploration and development in most cases. This makes many juniors takeover candidates.

Recently, two of our five junior gold recommendations have been taken over. We seek quality companies that offer value and growth potential, while exhibiting positive technicals. If they are taken over, it becomes a huge bonus.

If you're a precious metals investor seeking growth, you must have some foothold in the juniors. Playing GDX or a basket of large caps will likely leave you disappointed. In our service, we seek to steer investors toward the stocks that offer not only value but also growth potential. We invite you to consider a free 14-day trial as we search for the next takeover candidates.

Good Luck!

Jordan Roy-Byrne, CMT
[email protected]

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