Tuesday , 16 April 2024

Get Over It! Don’t Expect Gold Stocks to Outperform Gold

Gold, Ingots, Treasure, Bullion, Gold Bars, Wealth

Image Source: Pixabay

By Kelsey Williams (edited and abridged by editor of munKNEE.com – Your KEY to Making Money!)

Some History

When gold and gold shares peaked in August 2020, the future looked bright. It usually does at the top. When gold bottomed somewhere above $1600 oz. in late summer 2022, the decline from its peak price in 2020 was 20%. The miners, however, weren’t content just to mimic gold’s downside action. Instead, the losses for gold stocks in general amounted to more than 50%!

Now that gold is back to where it was in 2020, we might expect that gold stocks would have recovered similarly. Unfortunately, that is not the case. Gold stocks currently are only modestly (15-17%) above their 2022 lows. [Indeed,] ignoring the effects of inflation, holding gold for the period in question has yielded zero return/loss  but gold stocks are far from breakeven. Their losses are close to 45%.

Temporary Lag For Gold Stocks?

With the expectations by some that gold is on the verge of a big breakout on the upside, one might be lulled into thinking that such a move would boost mining shares out of their doldrums. That could happen; but, it is not something that is likely. Nor, is it something with historical precedent.

The financial and economic conditions that the more vocal gold bulls expect to trigger a significant increase in the gold price are the very things that would make it more difficult for gold mining companies to continue to operate at all, let alone mine the gold and sell it profitably. Lack of adequate financing, the cost of additional capital, strikes, and social unrest would likely be a common theme. If you can’t get the gold out of the ground, what is the point? Not only that, but the gap in performance of gold over gold stocks continues to widen. Below is a chart (source)…

HUI to Gold Ratio

Historically, gold stocks tend to underperform gold on the upside and the downside. The leverage effect that marketers and investors look for on the upside has only happened on a couple of occasions for a brief period of time. If you doubt that, look at the chart immediately above again.

Conclusion

There is nothing fundamental or historical to support claims and expectations for gold stocks to outperform gold. Get over it. (also see Still Betting On Gold Stocks? and Gold Stocks – Wishing, Hoping, And Losing)

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