Will 2012 Be The Return of Gold Stocks?

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Even gold stocks are getting in on the act. Mineweb reports that gold producers are now paying dividends in order to attract the punters. Who says gold doesn’t pay a dividend?! Now if we could just get them to pay it…in gold!

The fact that gold producers are paying a dividend is worth exploring. First, it means gold producers have cash flow. Now whether or not the best use of free cash flow is to return it to shareholders instead of pouring it into new exploration is for the punters to decide. But the fact is, gold is set to finish higher for the 11th straight year. Higher prices are boosting cash flow for producers.

Producers are paying dividends partly because they have the cash, but also because they have competition. Exchange Traded Funds (ETFs) have become a popular vehicle for precious metals investors to hitch a ride on rising prices. Low-cost ETFs have generally been bullish for gold bullion prices. But they may have also sucked out liquidity that in the past would have gone into gold stocks.

One further note to all this. The scandal at MF Global will turn out to be incredibly bullish for gold and silver shares in 2012. That’s small consolation for the investors at MF Global who’ve seen their assets disappear. But a recent article at Barron’s explains why confidence in the “paper” gold and silver market may be the biggest casualty of MF Global’s collapse. Barron’s reports:

The trustee overseeing the liquidation of the failed brokerage has proposed dumping all remaining customer assets – gold, silver, cash, options, futures and commodities – into a single pool that would pay customers only 72% of the value of their holdings. In other words, while traders already may have paid the full price for delivery of specific bars of gold or silver – and hold “warehouse receipts” to prove it – they’ll have to forfeit 28% of the value.

Imagine leaving your car to be valet parked while you go eat dinner with your wife. You eat a pleasant holiday meal, perhaps a Wagyu beef steak from the Margaret River, washed down with a 2007 Forrest Hill Cab Sav. When the valet comes back with your car, 28% of it – all of the boot and most of the rear tires – are gone. That would ruin your dinner.

It’s possible that no one but the paranoid and the idle are going to take note of what happens to MF’s customers. But it’s also possible that investors in gold may return to the share market in order to get exposure to precious metals. Keep an eye on that for 2012 – the return of gold stocks!

Gold stocks carry their own risks, of course. But a small reallocation by investors from ETFs and futures and to share could be a big boost for shares, which have lagged the bullion price this year. And of course all of this assumes bullion prices are not in a bear market but on the verge of a mania phase.

Let’s not beat around the bush, though. The MF liquidators are on the verge of ruining the whole idea of property rights. This is why we’ve repeatedly told our readers at Australian Wealth Gameplan that if you don’t own it, it’s not yours. This goes for gold, for cash, for anything really. Confidence that you can get what’s yours from a trustee or custodian is what prevents bank runs.

What do you think could happen when ordinary people realise that what’s theirs may not really be theirs when they need it? Definancialising your life – extracting the value of your labour from the financial system and converting into a permanent store of value – is what we’ve been banging on about for years now. It’s not too late. But you might want to hurry.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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5 Comments on "Will 2012 Be The Return of Gold Stocks?"

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Mick
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Buying gold is a great idea, but not from ETF’s.

Go down to the mint, pay for your gold in the ever decreasing valued fiat currency and take your bar home with you! It’s that simple.

Guaranteed you will always own 100% of your holding.

geo
Guest

Mick, when you sell your bar you will discover you do not own 100% of it. The government will take some. If stuff gets real bad, I can imagine a scenario where they might own all of it. Not many people own physical gold, so it would not be hard for the government to convince the 99% that do not own it, that everything is the nasty gold bugs fault, and by passing laws to nationalise all gold, they can save everyone.

shortchanged
Guest

Except Geo, the legislation has already been passed. All it takes is for the Governer General to sign it into law and you and your gold are history. What’s more,because it does not have to go before Parliament, you won’t even know the evil deed is done. Gives you a nice warm fuzzy feeling, doesn’t it?.
Happy New Year

johnnyt
Guest

hi geo and others.

The government, RBA and Governer General need to know you own the gold. So i suggest instead of going to your government loving bullion dealer or government owned Perth mint to purchase gold, who record all your details and pass it over to government. Go down a private dealer who writes ‘cash’ on the receipt and buy it privately. Or purchase direct from Ebay. Accumulate the gold over time secretly and the government thieves will be none the wiser. When the time comes, your black market gold will be worth much more than if it were not.

gerg
Guest

I would think that nationalisation of gold mines, or a gold miners super profits tax would be more likely than confiscation of gold bullion from private owners.
Gold and Silver bullion is GST free but may be subject to CGT though.

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