Is it a good idea to replace gold with gold mining stocks in PP?

[helpme]

I am wondering if this is a good idea. Gold does not pay an income. In fact, it comes with storage cost. However, gold mining stocks pay dividends and they tend to correlate with gold. Is it a good idea to replace gold miners with gold? Can the experts here share their opinions?

Negative views are most welcome. Please play devil's advocate and shoot down this idea.

[MediumTex]

No.

Comparing gold to mining stocks is like comparing a golden egg to a goose.

I understand the temptation, but it doesn't work the way you are imagining.

[helpme]

No.

Comparing gold to mining stocks is like comparing a golden egg to a goose.

I understand the temptation, but it doesn't work the way you are imagining.

May I ask why not?

[I Shrugged]

In the 2008-9 meltdown, gold stocks went down while gold went up.  I learned that lesson the hard way.

[KevinW]

This is covered in the FAQ
https://web.archive.org/web/20160324133 ... ation-faq/
and also the book and the podcast.

[MediumTex]

Briefly, the gold mining business is a nasty, expensive and risky business to be in.

One of the main risks is that every ounce of gold production is premised upon the belief that the price of gold will be higher than the production cost, but there is no rule that says that has to be the case.

The problem is that if your business model relies on leverage you can't just shut in your mines until the price of gold reaches more attractive levels.  You've got employees to pay, equipment payments to make, and debt that must be serviced.

When the price of gold drops, owners of bullion will experience losses, but owners of mining stocks can be completely wiped out.

Just do a comparison of GLD and GDX over the last five years, and it tells the story pretty well.  The price of gold is down 10% from where it was five years ago, while the gold mining stock index is down 73%. 

[dualstow]

No.

Comparing gold to mining stocks is like comparing a golden egg to a goose.

A goose that may have its best laying days
    (best laid plans?)
behind it.

[Libertarian666]

Absolutely not. Gold mining stocks are stocks, not gold. They have immense risk, including strikes, taxation and even the risk that large sections of the gold mining industry will be shut down due to its horrid environmental impact.

Gold has none of those risks, and in fact would benefit if the gold mining industry went out of business entirely.

[mathjak107]

in the scheme of things gold stocks are just that , they are stocks first and a play on gold 2nd .

you could buy some in the variable portfolio but:

the pp either has to be done in it's design or not . once you change things you are trying to be a little bit pregnant .

while you could use a vp  , realize despite the fact you are still using the pp all your assets work together and the entire mix is really your new allocation so in effect anytime you have a vp you have altered the pp . you are just trying to cloud that fact by smoke and mirrors  dividing  things up on paper .

when i used the fidelity insight models i ran two models , 2/3 the capital preservation and  income model ( 26% equity )    and 1/3 the growth and income model  70% equity .

at the end of the day i had a 40/60 mix no matter how i broke it out on paper  .

[Matthew19]

I echo what everyone else just said.

I once had 100k extra dollars that would say "don't speculate in gold miners if you want to keep me"

[MediumTex]

I echo what everyone else just said.

I once had 100k extra dollars that would say "don't speculate in gold miners if you want to keep me"

I've heard that one of the quickest ways to make a small fortune is to start off with a large fortune and invest in mining stocks.

[craigr]

Some of the biggest investing shysters I've ever heard have always been pushing junior mining stocks. The entire industry is a money sinkhole, and I don't mean one with gold at the bottom.

If someone wants to invest in mining stocks as a speculation, I'd stick to a large well-managed index fund like Vanguard's. Otherwise, I'd just leave them alone and buy more of the general stock index if you want to try to goose returns.

[mathjak107]

i remember owning ASA  back in the 1980's and there was a south african miners strike . gold went up while mining stocks fell .