Investing in gold or gold mines?

According to some investors, shares of gold mines are a kind of leverage on the gold price, because a change in the gold price has a much greater impact on the profit margin of a mine. The difference between the price of gold and the cost of production of a mine is the profit margin for the gold mine. A small change in the price of the precious metal therefore has a much greater impact on the profit (and therefore the value) of a gold mine than on the value of a gold coin or gold bar.

In theory, this sounds very logical, but in practice it turns out to be a lot more unruly. In the long run, you might indeed expect the value of a gold mining stock to be determined by the profitability of the mine, but there are many more factors that can influence the value of the stock. Consider, for example, the government's counterparty risk, wage demands from miners, changes in production costs and unexpected setbacks as a result of bad weather or strikes.

Do gold mines yield better than gold?

In the past, there are indeed examples of periods when gold mines achieved a better return than gold itself. The most well-known example is the Bull Market from the late 1970s. But if we look at the more recent development of the gold price and gold mining stocks, we see that the roles can sometimes be reversed in practice.

Via the website of the NASDAQ, we collected historical data on the development of the gold price and gold mining shares. For the gold price, we took the daily closing price of GLD, the largest gold ETF in the world that tracks the gold price quite closely. For the price development of gold mining shares, we looked at GDX, an index consisting of several large gold miners.

Gold vs. Gold Mining Stocks Returns Since 2007

Gold has performed better over the past decade

If we look at the price development of the past ten years, we see that gold has actually performed much better in this period than an index of several large gold mines. The price of gold rose by more than 70% during this period, while the value of gold mining shares fell by more than 40%.

Of course, this comparison is not entirely fair, because gold mines can also provide additional income in the form of dividends in good times. Physical gold does not pay dividends, but on the other hand, the precious metal itself has no counterparty risk.

If you are looking for a safe haven for your savings, gold bars and gold coins are preferable to gold mining stocks. But if you are willing to take on more risk, the mines can also offer interesting returns in certain cases. Especially if you know how to find the right one from the wide range of gold mining shares.