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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

One Chart May Explain Why Gold Stocks Are Lagging Bullion

March 1, 2013

It may be time for certain gold stocks to shine, writes Bryan Borzykowski in a Canadian Business article this week. He highlights many of the issues that have come to the surface over the past few years, including the bad decisions made by management, capital cost increases, and the birth of the gold bullion exchange traded fund.

But there’s a sea change occurring, as the industry has had executive turnover and many write downs in an effort to right the wrongs. “If gold companies continue to reinvent themselves … investors could see even better returns on stock than on bullion,” he writes.

We’ve talked about these issues several times, and many were confirmed when Jorge Beristain from Deutsche Bank visited our offices lately. Beristain talked about multiple changes gold companies are expected to make this year to draw investors, including reporting true industry production costs, reining in excessive capital expenditures and ceasing the dilution of shareholders via equity issuance for deals.

I believe diluting shareholder capital has been a major cause of underperformance compared to bullion. Based on U.S. Global’s independent research of 80 gold companies, production among global gold producers over the past four years has increased 14 percent on a cumulative basis. However, on a per share basis, gold production actually decreased more than 9 percent.

Gold Production Growth vs. Per Share Gold Growth

Even though we have been in a rising gold market, the economic value per share has been diluted, as gold miners issued shares faster than they discovered the precious metal or faster than they increased their production. As a result, stocks have underperformed.

Not all gold miners have diluted shareholder value. That’s why “with the problems the industry is facing, you want to make sure you’re buying a good business,” writes Borzykowski. As I explained to him, gold companies paying or increasing their dividends is a significant factor that shows a prudent use of capital and fiscal discipline. 

Skin in the game is also important. I indicated that companies with executives who own shares have historically outperformed the companies where management did not own stock.

For our Gold and Precious Metals Fund (USERX) and the gold mining companies in the Global Resources Fund (PSPFX), we seek stocks with experienced management that have shown proven growth in production, reserves and cash flows on a per share basis. Over the long-term, these gold companies have historically outperformed.

Over the first weekend of March, Ralph Aldis, portfolio manager of the gold funds (USERX and UNWPX), will be speaking on these issues at the Prospectors and Developers Association of Canada (PDAC) conference in Toronto, helping investors understand the importance of active management in the gold mining industry.

Read Canadian Business article “Gold Stocks’ Time to Shine.”

 

See also:

Gold mining Truck Find out what’s driving gold companies?

Gold Miners Read how gold miners can leverage price of gold

The Gold Report See The Gold Report interview with Ralph and Portfolio Manager Brian Hicks discussing the gold miners that are focused on growing returns

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

Net Asset Value
as of 09/19/2019

Global Resources Fund PSPFX $4.46 0.01 Gold and Precious Metals Fund USERX $8.78 0.16 World Precious Minerals Fund UNWPX $3.22 0.03 China Region Fund USCOX $8.51 -0.05 Emerging Europe Fund EUROX $7.08 -0.03 All American Equity Fund GBTFX $24.95 0.05 Holmes Macro Trends Fund MEGAX $17.04 -0.07 Near-Term Tax Free Fund NEARX $2.22 0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change