Newsletter – April / May 2006 – Gold Stocks vs Gold Bullion

Gold Stocks vs Gold Bullion

Some time ago we began purchasing units of bullion for our more conservative and moderate clients. It made me wonder whether our clients or other investors knew that there are some differences between buying gold stocks and buying gold bullion – yes they are not the same thing. In explaining what they are and how they translate into unique opportunities there is also general investing information to pass along. A good place to start would be to understand how the stock market prices any security in the first place.

The stock market is always about economic conditions six months to a year in the future. This may seem to be an odd concept for some investors, especially when we hear about an asset running up in value over a short period of time, like a week or a couple of days. Occasionally, this is simply a re-pricing of an undervalued investment. More public information or new developments can cause undervalued assets to be brought to their true market value. But more often than not when something rises extraordinarily in this way it is really mass psychology at work – a lemming affect.

The old axiom of “buy the rumour, sell the news” is not a time-tested phrase for nothing. If you are an investor who pays attention to individual securities or who watches the market more closely you’ll understand this lesson when you’ve watched a security run up for a few days, particularly following a “news release” or newspaper headline, only to fall back, sometimes even below the break out price. The same can apply to an investment which drops from apparent emotional selling.