GOLD STOCKS – FANTASY
“There is more money to be made in gold stocks compared to gold because gold stocks benefit from a leverage factor that potentially produces gains more favorable than holding gold itself.”
At the end of 2023, the cost to mine gold was estimated at $1342 oz. (World Gold Council, Tomlinson; 16May2024). With gold at the time somewhere near $1950 oz., the implied gross margin was $600 per ounce. As the gold price rises, it is assumed that the mining costs would remain relatively stable, or at least rise more slowly, and not as much on a quantitative basis.
Hence, further increases in the gold price would translate to higher proportionate gains to the mining company on future gold sales. At $255o oz., the expected margin increases to $1200 per ounce. In other words, as the price of gold increases, the margin per ounce continues to rise, thus increasing potential profits.
In the above example, a doubling of the profit margin ($600-1200 oz) might be expected to fuel higher stock prices for mining companies that would far surpass the profits to be earned by investing in gold in its finished form and holding it for a relatively smaller gain of 30% ($600/$1950).
In addition, “because gold mining stocks are currently underpriced compared to gold bullion, the potential profits are even greater than might be expected otherwise”.
GOLD STOCKS – REALITY
Below is a chart (source) which shows the month-end ratio of the NYSE Arca Gold Bugs Index (HUI) compared to the price of gold bullion back to 1996. The higher the ratio, the more favorable has been the performance of gold mining stocks; the smaller the ratio, the more favorable has been the performance of gold bullion…
HUI to Gold Ratio 1996-2025
In December of 2000, the gold price was at $271 oz. From that point over the next 3 years, the gold price increased to $406 oz., a gain of fifty percent. Gold stocks performed even better, rising six-fold over the same time period. The net out-performance of gold stocks is shown on the chart above with the gold stocks-to-gold ratio rising from .15 to more than .60.
Alas, that three-year period of super success for gold stocks compared to gold was followed by 22 years of declining performance, thus far. The current gold stocks-to-gold ratio is .11, just slightly above the .10 mark touched in 2024, and prior to that in 2015.
The reality of the decline in the ratio from .60 down to .10 is exacerbated by the fact that not only are gold stocks underperforming gold bullion on a long term basis, they are net losers over the past 14 years, even in the face of a sharply higher gold price. See the chart (source) below…
Since the peaks for both gold and gold stocks in 2011, the gold price has increased by more than 50% ($1900 – 2900); whereas, gold stock prices have declined by 50%.
As far as gold stocks being undervalued relative to gold bullion, well… of course they are. If they continue to underperform so drastically as has been seen, then how could they not be undervalued? Those who claim that gold stocks are undervalued mean that their prices have not gone up as much as expected, and, therefore, should increase substantially to make up for their failure to meet expectations. Good luck with that.
CONCLUSION
There are a several reasons to not own or invest in gold stocks, except on a short-term, very speculative basis. They are underfunded operations (in most cases) subject to a host of external risk factors including labor strikes, shut downs, nationalization, etc. The biggest risk factor for most investors is the continuation of historical long-term underperformance, coupled with the risk of outperformance on the downside.
The biggest declines in gold stocks come when gold and/or stocks in general fall precipitously. That has been shown clearly with gold stocks versus gold 1980-2000; and with gold stocks versus stocks in general (most recently in 2020 and 2022).
Earlier this year, I included gold stocks on my list of five investments to avoid in 2025. The reason for that warning is that I believe the risks outweigh the potential rewards. I still do.
If anything has changed, it is that the risks are greater now than at the time (December 29, 2025) I wrote the article.
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
