Sprott Downside Suprise

Do you need any further proof that relying on equity price returns might absolutely be the wrong strategy in these markets, look at the downside surprise in Sprott. In order to provide a return in these markets, you absolutely must provide a dividend yield.

In Canada, that means you are tax-advantaged with obtaining dividends as opposed to anticipating equity gains which simply don't exist, especially for the gold mining sector. If you caught the absolute bottom of the crash and sold at the very top of the rally, you could boast these types of gains. But investments require you buy and hold these equities, rather than flipping them.

Gold miners are your quintessential example of poor returns in equities, simply because they have lagged gold so badly. Gold miners are equities that should be providing a robust return in this liquidity driven rally in equities, especially since gold prices are very strong. (as opposed to weak)

Gold miners however are literally sitting on a gold mine and could provide dividend yields that would astound. But there is a lack of confidence among the gold miners themselves. They almost universally believe that gold is showing weakness rather than robust stability, and that they provide guidance that gold "should be" priced @$1200/oz.

Look what Sprott says:

“In 2011, the sovereign debt crisis led to unprecedented volatility and central bank intervention in the markets. Our funds were defensively positioned throughout the year. However, weakening prices in precious metals and, particularly, their related equities, negatively impacted our investment results and performance fee generation,” Peter Grosskopf, chief executive of Sprott, said in a statement."

You see? Even these reputed investment managers in the gold sector believe that gold prices are weak rather than very robust. You can put this down to lack of business confidence in the sector because the assumption of equity price gains is false. How much more proof do you need?

Here is the equity price argument vs. the dividend yield argument:

http://www.bloomberg.com/video/88896600/

Financial Post

-F6