ETFs
Everything You Need to Know About Gold Stocks
After the introduction of gold and silver ETFs and a 13-year secular bear market, everyone knows that gold mining sucks. Just ask Hugh Hendry.
But the truth is much more nuanced.
Here’s almost everything you need to know, broken down into a list.
1) Gold stocks are options on the price of gold
The introduction of the first Gold ETF (GLD) in 2004 and the first Silver ETF (SLV) in 2006 relegated miners to Gold options. Before 2004, investors and portfolio managers could only gain exposure to gold or silver through mining companies.
As a result, mining companies were more widely owned and traded at higher valuations in the last century. However, the opposite is true. Miners have taken a back seat to ETFs and trade similar gold options.
2) Gold Stocks Outperform Gold During Gold Breakouts and Crash Rebounds
Gold stocks outperform gold when gold is making strong trend moves, as this is when mining margins rapidly accelerate. This happens during and after major gold price breakouts and significant rebounds, such as immediately following gold price lows in October 2008 and March 2020.
3) Gold stocks outperform during cyclical gold rallies
Cyclical rallies in gold tend to last about three years and usually include a breakout in the gold price.
Gold’s cyclical bull market from August 2018 to August 2020 included the breakout of $1,375 in July 2019.
Gold’s cyclical bull market from October 2008 to April 2011 included the $1,000 breakout in September 2009.
The cyclical bull market from 2004 to 2007 included the extremely significant breakout in fall 2005, during which gold surpassed $500 an ounce for the first time in decades.
The chart below represents Gold, GDXJ and HUI. Yellow highlights cyclical bull markets and vertical lines mark gold price breakouts.
4) Bear markets in gold stocks are brutal
Look at the Barron’s Gold Mining Index chart going back 100 years. I annotated bear market declines.
Barron’s Gold Mining Index increased 40-fold between 1960 and 1980, but suffered declines of 63% and 69%.
The secular bear market from 2000 to 2011 included a crash during the global financial crisis.
Gold stocks could soar over the next few years, but there’s a good chance a severe bear market could occur before 2030.
5) Gold outperforms gold stocks over very long periods of time
Gold stocks are expected to outperform gold for the duration of a secular bull market. But when looking at periods of 15 years and beyond, gold is a much better option.
6) Inflation-adjusted gold price is the best indicator of gold stocks
The chart below represents the Barron’s Gold Mining Index and the inflation-adjusted price of gold.
The inflation-adjusted price of gold (gold relative to CPI) is an excellent indicator of gold miner margins. Gold stocks follow margins, not the price of gold.
Today, the market is two months away from gold breaking out of its 13-year cup-and-handle pattern. Even though gold and silver correct, miners are showing relative strength and hinting at what’s to come.
If gold’s current cyclical rise lasts another three years, I would expect mining companies to outperform gold for another 18-24 months.
This is the ideal place for minors. The outperformance of junior gold and silver is only just beginning.
Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. This is not a solicitation to trade any commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no liability for loss and/or damage arising from the use of this publication.