"Everything you need to know about gold"
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.
GOLD STOCKS VS. GOLD
The long-term underperformance of gold stocks compared to gold itself is clear and indisputable. A matter of remaining contention is whether or not beleaguered investors in the not-so-shiny metal stocks will ever recover from more than twenty years of disappointing and largely negative results. It isn’t just the poor relative performance, though; holding gold mining stocks has been a losing proposition in its own right.
Below is a chart which shows the relationship of the HUI (NYSE Gold Stock Index) relative to the price of gold…
GOLD STOCKS ARE WORSE THAN GOLD
Gold stocks latest swoon confirms what has been stated and inferred in my previous articles about gold mining shares – namely, gold stocks are a lousy investment.
The original article linked in the preceding paragraph was published in September 2016. I just finished reading it again and find no reason to edit or modify its contents.
The price of gold peaked in the summer of 2016 – shortly before my article was written and published – at $1357 oz. (monthly average closing price). At that time the GDX (ETF index of gold mining shares) peaked at 30.60.
Both gold and gold mining shares (gold stocks) have been lower and higher since then, and the past six years have seen a fair amount of volatility. Lately, both gold and gold stocks have undergone downside corrections since their most recent highs earlier this year.
So where are we now?
The rise and fall of gold stocks is a story of hurt and disappointment. That is because most of the time gold stocks are in decline.
Below are four charts which depict the sad story. Following each chart I will make some brief comments…
Apparently investors don’t tire of hearing the same old thing; and their advisors willingly provide the same questionable advice: “The best way to play this new bull market in gold is to buy gold stocks” or something to that effect. Are gold stocks a better choice than golditself? Let’s find out…
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.
Gold Stocks vs Gold…
Earlier this year, various gold stock indices (XAU, HUI, GDX) gained more than fifty percent in just three months. Most of the negativity associated with the sector was brushed aside and replaced by positive expectations for the future.
Of course, the 90-day rush to this year’s highs did not occur in a vacuum. The price of gold rose by twenty percent over the same three-month period. The mining shares, however were considerably stronger.
Going back to the fall of 2018, the price of gold increased by thirty percent and gold mining shares increased by about sixty-five percent. The resulting differential of more than 2-to-1 in favor of the mining shares lends possible credence to the argument for shares over bullion.
Nevertheless, when we dig a bit deeper, we see a different picture.See the chart below…
HUI to Gold Ratio (source)
This interactive chart shows the month-end ratio of the NYSE Arca Gold Bugs Index (HUI) to the price of gold bullion back to 1996. The 6 month moving average has been added to smooth out volatility and show the longer-term trend.
Looking at the chart above, we can see that gold stocks have declined much more severely than the price of gold bullion.
The potential advantage of owning gold mining stocks rather than physical gold, turned into a horrible disadvantage. The price of gold declined by forty-five percent but gold stocks dropped by more than eighty percent.
In other words, gold stocks dropped by nearly twice as much as gold bullion after gold peaked in 2011.
The results were not that good before that, either. Except for a brief three-year period between 2000-03, owning physical gold was less risky and provided better overall returns.
Below is a second chart, this one of the XAU gold stock index…
XAU to Gold Ratio (source)
This interactive chart shows the month-end ratio of the Philadelphia Gold and Silver Index (XAU) to the price of gold bullion back to 1983. The current month shows the latest daily closing values.
As can be seen, going back as far as 1983, the presumed advantage of owning gold shares over physical gold, does not appear to be evident.
Looking at the first chart again, we see that the HUI to gold ratio is at the same level as it was twenty years ago, when gold was at $275 per ounce. And, it has failed to exceed the level it reached three years ago in the summer of 2016.
Since that point in the summer of 2016, the price of gold has risen by as much as fifteen percent earlier this year. Currently, gold is up ten percent from that point.
Gold stocks, on the other hand, failed to even match their previous high, and are currently about thirteen percent lower than their peak levels of 2016. This can be seen on the chart below…
GDX – VanEck Vectors Goldminers ETF (source)
So how does this year’s performance for gold stocks vs. gold measure up historically? Below is the first chart above (HUI to Gold Ratio), again. This time the current year, 2019, is labeled. As you can see, this year’s outsized gains for gold stocks relative to gold is just a small blip…
Gold stocks have been a horrible, losing investment for decades. Compared to physical gold, their results are pathetic.
When will people wake up to the fact that investing in gold mining shares is not a good idea?
What are the experts seeing and thinking when they talk about the “positive outlook for mining shares”? For the life of me, I just don’t get it.
And, as far as gold stocks outperforming gold, well, just forget about it.
This year’s turnaround in Gold Mining shares had helped to buoy the hopes and dreams of investors who were ‘betting’ that their long, agonizing wait for euphoric, exponential gains is over. They continue to believe that the future for the Gold Mining Industry is quite rosy. Unfortunately, they are probably wrong.