Sunday, April 12, 2009

RGLD relative to Gold bullion

yesterday, Otto wrote a nice piece on the relationship between the price of Gold itself and the performance of Gold Mining companies. click the link below to read his analysis

Gold and gold miners: A chart study of correlations

his conclusion was that Royal Gold offered the best positive leverage to bullion prices. that seems generally valid to me, though I would like to point out even RGLD has broadly lagged the price of bullion since the beginning of 2003. the charts I include here should make this plain:

(click image to view full size)

some observations:

1) RGLD seems to have just completed a 'Five Wave' bull run.

2) after significant out-performance of RGLD to bullion in 2001 and 2002, the RGLD-Gold ratio has never since hit a new high.

3) the major tops in the share price of RGLD and its ratio to bullion tend to coïncide.

4) further, these major tops have so far occurred at three year intervals. (notice vertical lines on chart.)

5) the tops and bottoms in the share price and the ratio to bullion seem to have more relation to the investment sentiment surrounding Gold than the actual Dollar price of Gold.

6) RGLD has a P/E ratio well above 30 and pays a shit dividend. I'm sure there is some 'reason' for this overvaluation because it's a 'royalty' company or something (feel free to enlighten me), but unless the bull clique in Precious Metals can find a new marketing pitch right soon, dumb-ass investors (of course I'm not talking about you! it's the Other I have in mind...) who moved into the sector the last several months will start to realise that there are plenty of 'solid' companies trading at P/Es of 10 or less and actually paying decent dividends.

so if I am right about this transitory investment environment and Gold declines further while cheap piece of shit companies get reflated, then there exists a real potential for a company like Royal Gold to get the living crap kicked out of it.

beta works both ways, yo.

but on a more general note, what is with this obsession with owning Gold Miners for 'leverage'? why fuck around? if you want leverage to Gold, trade Gold futures.