They could also do just the opposite. Gold, gold stocks and the SPX all appeared correlated in 2008, and specifically at the time of Lehman's failure (though gold stocks of course showed much more weakness than the metal) and for about a month afterwards - after which both gold and miners significantly outperformed; $HUI had already doubled by the time stocks bottomed in 3/09, and of course they outperformed from late 07-mid 08. Furthermore, 2001-03 was a huge bull run in the miners: $HUI increased sixfold during the same period where SPX was cut nearly in half. In conclusion, the direction of gold stocks seems to have much more to do with a) the price of gold itself, and b) cyclical psychological/sentiment factors exclusive to miners' stocks than it does with the broader market direction. The thing is that both gold and the miners have already suffered significant declines from their peaks, comparable to 2008. I think they're likely to hold up just fine in a standard bear market, the main threat being a black swan Lehman-like absolute global panic which could cut the price of both by 25-50% in a month or two. Were this to happen I'd definitely be backing up the truck and putting on an extra-large position, betting on a quick doubling in 3-6 months once the printing presses spin up. And who knows, if a 'panic' were to take place while gold and the miners are in the early stages of another cyclical bull, rather than at the tippy-top of an eight-year bull run, perhaps they'll spike instead.
Lower EPS in comparison to what? The range of earnings quality, revenue stability and compounding growth potential in high beta stocks is so wide, talking about them as an asset class is like talking about hedge funds as an asset class (which is of course silly). I don't see how such a general purpose statement has applicable value. If one were to find the next SWHC or MNST on its way up, for ex., I don't think there would be any "lower EPS" worries over finance terms.
Are you merely pretending to completely miss what I was saying, or are you really going to interpret my rhetorical question in the most retarded fashion possible (e.g. as if I were seeking an answer from investopedia.com).
ES just popped big (10 handles) on G20 rumors of central bank coordinated action, and gold does almost nothing while GDX barely even keeps out of the red. Either the rumor is already killed - but then why is ES still up -- or something is wrong (GLD / GDX).
This ignores the potentially higher frequency of very large losses in stock A. Without knowing the specific probability distribution, you cannot say that the leverage is 'free' - it could be very expensive (e.g. if stock A has 10 times the chance of going bust as stock B). Also, it ignores the fact that the market price could/would factor in this benefit of the downside liability cap and higher effective leverage. Anyway, the main question was why choose gold stocks over gold for this play, that's more important.
I didn't say the leverage is "free" -- although there is unquestionably asymmetric value to be had -- and I also said ceterus paribus, which means you can't assume the higher beta stock has a greater likelihood of going bust than the lower beta one. To confuse greater likelihood of movement in either direction with greater risk of permanent capital loss is to make the mistake Buffett warned against (conflating volatility w risk, or lack thereof w lack of risk); plus, via basic observation, there were plenty of earnings-smoothed lower beta stocks over the years (like GE, Fannie Freddie etc) that were far greater risks of going kablooey, than, say, any number of well run higher beta small caps. As for what the market "would factor in," nigga please. The market is absolutely terrible at factoring in all kinds of things, which is patently clear to anyone with enough value investing experience. Re, main question, who cares what's more important -- if you grew bored with the beta aspect of the question, why then bother to reply?
What in particular do you find interesting about it? Most observers (especially academic ones as seems to be the case here) make the same old mistake of trying to analyze the gold market like you would the market for timber or soybeans. In practice virtually no gold is ever 'consumed' - it's merely shifted around between different owners with the market price being set by 'reservation' demand, itself determined by countless unquantifiable factors. When it comes to the big-picture secular trends, I suspect central bank purchases are every bit as irrelevant as mining output and jewelery demand. It's also not especially surprising that the gold price fails to move in lockstep with a government price index - though I note that the gold price actually seemed to track the CPI-implied price fairly well before 1987-89 (that would be when ol' Alan came on the scene) and intersected it again from 2006-09 - before Helicopter Ben blew the roof off.