Why Gold Mining Stocks Outperform Gold in Bull Markets

Gold mining stocks are much more volatile than gold bullion and have a variety of additional risks dependent on their company structure, jurisdiction of operations, and operational efficiency but they can be an alluring option for investors who are looking for exceptional returns in gold bull markets. Here’s why.

This infographic:

• compares the returns of gold stocks and gold bullion in bull markets
• explains how gold stocks outperform thanks to profit expansion, and
• shows why there might be more upside for gold miners to come.

Breaking Down Gold Mining Costs and Profits

During the 2000-2011 gold bull market, the price of physical gold rose 550% while…over the same period of time, gold mining equities (represented by the NYSE Arca Gold Miners Index) returned more than 690%. In the current gold bull market which started in 2015, gold mining stocks are up more than 182%, more than doubling gold bullion’s 78% returns. This outperformance in bull markets is largely due to how gold mining companies use their operating leverage to maximize profits, resulting in their share prices appreciating.

• When the price of gold rises, miners immediately start to see greater profits from selling their ounces on the market. While the costs to mine gold also rise in bull markets, they rise less and at a slower rate. The result of this is profit expansion: when operationally efficient gold mining companies are able to capture larger profits, resulting in increased operating and free cash flow.

…During the current gold bull run which started in 2015, Barrick Gold’s average realized price per troy ounce of gold increased by 50%, while their all-in sustaining costs per troy ounce only went up by 18%. This has resulted in the company increasing their profit per ounce of gold sold  by a staggering 134% over the past six years….

Why Gold Mining Stocks May Still Be Undervalued

Even if gold mining stocks have already seen impressive returns over the past five years, there are some technical indicators which point to them still being undervalued compared to other equities and gold bullion…[namely:

• The top 10 gold mining companies have seen their earnings per share estimates almost triple in the past two years compared to the top 20 S&P 500 companies which have seen around a -15% decline in their earnings per share estimates.

…Gold mining stocks may also be undervalued compared to gold bullion. The gold mining stocks-to-gold bullion ratio is at historically low levels after having dropped more than 60% following the 2008 financial crisis…

Gold and Gold Miners’ Role in the Future Economy

As money printing has been the Federal Reserve’s main answer to an increasingly volatile economic climate, gold and its producers are set to play a crucial role in helping investors preserve their wealth…[and, while] gold mining stocks are much more volatile compared to gold bullion, and have a variety of additional risks dependent on their company structure, jurisdiction of operations, and operational efficiency, they can be an alluring option for investors who are looking for exceptional returns in gold bull markets.

Editor’s Note:  The original article by Niccolo Conte has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read.  The authors’ 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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