Hugh Hendry, the amusing Scotsman who runs Eclectica Asset Management, hates gold stocks. He won’t buy them under any circumstances. Which is interesting, considering Hendry is partial to macro doom forecasts, and has made large amounts in years past betting on gold.
The gist of Hendry’s anti-gold stock argument, which he summed up at a recent Economist conference, boils down to political risk. In a nutshell, the ideal scenario for gold is also the nightmare scenario for gold stocks, politically speaking, because so many mines are in politically vulnerable jurisdictions.
Think of how Venezuela and Argentina have treated the oil majors, courtesy of Hugo and Cristina.
If the yellow metal does what gold bugs think it could do, the copycat Chavistas of the world will be sorely tempted to pull a Lumberg:
“Hmm, yeah… you know those ownership rights a previous government agreed to? Yeah, we’re gonna have to go ahead and tear those up… sorry…”
We make these comments in the presence of a remarkable divergence, as clearly demonstrated in the charts at right. Namely, gold and silver look excellent here… but the actual metal miners look like crap.
There are, of course, other problems for precious metals stocks alongside the Hendry criticism… one of them being so many gold and silver mines are run by idiots.
Not in all cases, certainly. But in far too many instances a promising macro outlook, bolstered by a rising bullion price, is diluted by some moronic acquisition, in which a highly speculative new property is bought at a ridiculous premium. Or worse yet a flat-out dilution comes out of the blue, in which a huge block of new shares hits the market with a thud (often at exactly the worst time).
Little wonder, then, that many of the precious metals persuasion prefer to just buy gold (and silver) directly, as opposed to screwing around with the miners. With the actual metal, political risk is a plus, not a minus — if something blows up in the Middle East, gold benefits — and there are no concerns of grasping governments forcing a writedown on the value of your main asset (or stealing it completely).
One final point in favor of the metals: A stronger and more diversified demand base.
At the Grant’s Fall Investment conference, Pierre Lassonde, a 40-year gold market veteran, gave his bullish views on gold. In that presentation, Lassonde noted that India and China now account for 47% of gold demand. The rest of the world, not including the Middle East, is good for another 41%… which means that somewhere close to 90% of gold demand is non-US centric.
Add to the above the fact that central banks have become consistent net gold buyers, rather than gold sellers, for the first time in 20 years, and you can see how the yellow metal itself has persistent demand sources that gold stocks do not.
Whereas the miners’ returns may well be driven by “hot money” — much more fickle investment flows — gold and silver could have a greater stability element. As noted in previous Global Macro Notes, we took long gold and silver positions a week ago (catching an early print on the breakout)… to see our full roster of positions, along with sizing guidelines, in-depth commentary, risk points and so on, check out the Mercenary Live Feed.