Siren Song Of Gold Mining Shares

GOLD WILL CONTINUE TO OUTPERFORM MINING SHARES

No amount of wishful thinking and baseless proclamations will change that. Owning gold stocks (miners) instead of the actual physical metal (in other words, processed and refined with appropriate hallmarks and in tradable form) is a losing bet. Investors should ignore the siren song of gold mining shares.

At their highs last week, gold stocks had increased eighty percent from their lows just two years ago. If you had bought then, and held through a thirty percent drop in 2023, you would be up about seventy percent at current prices.  That compares very favorably to gold which was up fifty-five percent over the same period. Congratulations if you benefited from that.

If we go back to early 2022, however,  gold stocks peaked, then lost more than fifty percent over the next several months. Physical gold over those months was dropping, to be sure; but, gold’s decline was only half as much as gold stocks. The net effect is that gold is currently up twenty-five percent ($2000 to $2500) since March 2022, whereas gold stocks are down ten percent.

If you are an owner of gold stocks for longer than the past two years, the news only gets worse. Since August 2020, the price of gold has increased by twenty-five percent and gold stocks have declined by twenty percent.

None of this is unusual or unique. Nor, should it be surprising. After gold and gold stocks peaked in 2011, the yellow metal began a highly volatile descent with its price dropping from $1895 to $1060, a loss of 44%. Not to be outdone, gold stocks seemed to give up the ghost, losing more than eighty percent by December 2015.

From that point to the August 2020 peaks, the gold price nearly doubled from $1060 to $2060. Gold stocks bettered that with an increase of two hundred fifty percent. Wonderful! Fabulous!! Except for some overlooked details.

As we said earlier, gold stocks had previously fallen twice as much as gold had, leaving them way behind gold when the move upwards started in early 2016. Even with their temporary outperformance, gold stocks peaked in 2020 still down more than thirty percent from their peaks nine years before, in 2011. 

WHERE WE ARE NOW

Currently, thirteen years later, gold stocks are down forty-five percent from their highs in 2011. Gold, on the other hand, is up thirty-one percent. Gold stocks failure to keep pace with a rising gold price over time is shown on the following chart…

HUI to Gold Ratio 1996-2023

Except for three years between 2001-04, gold stocks have continually lost value relative to gold. The increase during that time was more a catchup for the ground lost after both gold stocks and gold peaked in 1980.Since gold and gold stocks peaked in 1980, gold has been a better place for your money. Ironically, that is true on both the upside and the downside. As I said in a previous article…

(watching the) “price performance of gold stocks is like (watching) a marathon runner who continually loses ground to the competition, but occasionally runs really fast to catch up; never quite reaching his previous place, then falling further behind (over and over).

If you currently hold gold stocks and have benefitted from the latest sign of life/dead-cat bounce in share prices, sell them. Any outperformance is temporary and won’t last. If you want to own gold, then buy gold with the sales proceeds of your gold stocks. (also see Gold Stocks vs Gold – Choose Gold and Gold Has Done Its Job – Isn’t That Enough?)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

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