Gold Stocks Collapse…Much Worse Than Expected

GOLD STOCKS COLLAPSE

You would think that the recent collapse in prices for gold stocks was harsh enough to silence those who advocated their acquisition as the “best way to play the coming gold boom”, but they are back at it with fervor.

Some investors share in the enthusiasm, too: “On March 18th 2020 the precious metals mining stocks began what will be the biggest bull run in living memory…” (from one of my readers)

The implications of the statement are fairly clear. Get ready for an exhilarating ride to the moon, or thereabouts, if you are in the rocket ship named ‘gold mining shares’.

Before you buy your ticket, though, here are some facts that may help you decide whether or not the gold stock rocket is for you.

HERE’S WHAT HAS HAPPENED TO GOLD STOCKS

On Monday, February 24th, the NYSE Gold Stock Index, HUI, peaked in the morning at approximately 260. This was the same day that stocks in general began their initial descent. By the end of that week, the HUI was down nearly twenty percent at 210.

The twenty percent decline for the HUI was larger than the decline for stocks in general, with most major stock indices down close to seventeen percent.

After a week’s reprieve, the decline continued in smashing fashion, taking the HUI down to 142, for a total decline of forty-five percent in three weeks. See the chart (daily prices, one year) below for a graphic illustration of the carnage…

(source)

Sometimes, on a short-term chart, though, a movement of any kind can look more impactful. On a longer-term chart, the same move might not look so ominous.

In the ten-year chart of the HUI below, average monthly prices are used. This tends to smooth out the more extreme volatility. Let’s see if makes a difference…

As you can see, the drop doesn’t appear to be quite as bad on this chart when viewed in the context of the bigger picture; but…

Unfortunately, the percentage drop (forty-five percent) over the recent 3-week period beginning on February 24th was almost as big as the drop (fifty percent) from 600 to 300 in the HUI from August 2011 to May 2013 – and occurred in only 1/30th the time.

While the losses for stocks in general were steep, reaching thirty percent for most major stock indices, the decline in gold mining shares exceeded that of other stocks by fifty percent. What happened to the “anti-stock(s)”?

Someone referred to gold as an/the anti-stock, so what was gold doing? Over the exact same three-week period, the price of gold declined almost fourteen percent.

That’s not nearly as bad as gold stocks, so why did gold stocks decline more than three times that amount? Further, why are some people still so adamantly bullish about gold stocks?

Here are some things to keep in mind if you are still tempted, or persuaded, to invest in gold stocks.

THINGS TO KNOW ABOUT GOLD STOCKS 

1. At their current prices, gold stocks in general are thirty percent lower than their peak prices during the summer of 2016; whereas, gold is more than twenty percent higher.
2. Since their respective peaks in 2011, gold stocks are currently lower by more than five times as much as gold bullion.

What makes no. 2 above so much worse is that only three months ago, in December 2019, gold stocks were lower relative to gold by only a 2:1 margin.

Gold mining stocks are a lousy investment. They are not a ‘proxy’ for gold. Holding physical gold itself has been many, many times more profitable than owning a diversified portfolio of mining shares.

An investment in gold mining shares is an investment in a highly speculative, under capitalized business operation which is affected by too many variables other than just gold.

(also see: Gold vs Gold Mining Shares – Just The Facts, Ma’am and Gold Stocks vs Gold – Cryin’ Time Again)

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!