…Most investors in gold stocks are not betting on the mining industry as much as they are betting on gold itself. They have invested in gold mining stocks because it is more convenient than owning the physical metal. They also think that owning mining stocks will lead to bigger gains as the price of gold continues to go up. The logic goes something like this:
- Since mining costs are presumed to be relatively fixed and since the mining output is reasonably stable, a higher than expected gold price will bring higher profits even if production remains at the same level.
- The expectation of higher profits for the mine leads to the presumption of higher stock prices…
Unfortunately, it doesn’t happen that way; regardless of how logical it sounds.
Most of the biggest gains in gold stocks relative to gold bullion have come in a short period of time at the early stages of gold bull markets. You can see this on the HUI to Gold Ratio chart below for the period 1999-2003.
Other than that, the gold stocks to gold ratio has been in declining mode for most of the past four decades, ever since gold peaked in 1980. You can see this on the XAU to Gold Ratio chart below.
Even with the short-term gains in gold stocks relative to gold bullion between March and August this year, both gold stock ratios above failed to reach their previous high from August 2016 and remain today at near 40-year lows. At today’s prices, gold stocks are about fifty percent cheaper than they were in August 2011, while physical gold is at or near its peak from August 2011….
Gold continues to outperform gold stocks and does so with less risk.
Editor’s Note: The original article by Kelsey Williamss has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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