Graphic: Gold vs Gold Mines since 1939

In recent years, gold mines have yielded more returns than gold, but over a long period of time, gold has performed much better. Since the beginning of this century, the value of the precious metal has doubled compared to a basket of gold mining stocks. Over a longer period of time, gold also shows a better track record than the gold mining sector. Only in the 1960s and 1970s did gold mines structurally yield more returns than the precious metal itself.

We collected historical data from two different indices to compare the performance of gold mining stocks against the gold price. For the period from 1939 to September 2015, we used the Barron's Gold Mining Index (BGMI), then the Philadelphia Gold and Silver Index (XAU). The graph below shows the ratio of these gold mining indices to the gold price. An upward trend means that gold mines increased in value compared to gold in that period, while a downward trend means that gold yielded more in that period.

Over the past twenty years, gold mines have underperformed gold itself

Gold vs Gold Mines

Many investors see gold mines as a kind of leverage on the Gold price, because the profit margin of a gold mine increases more than proportionally with an increase in the price of the precious metal. However, this is not evident in practice. For example, mining stocks outperformed gold in the 1960s, while the price of the yellow metal fell during that period. If we look at the last twenty years, we see just the opposite. The gold price rose in this period, but on balance the mining shares did less well. Apart from a few short and powerful rallies in gold mining stocks, you have had to deal with Physical Gold better.

If we look at the long term, we see that gold mining stocks are still relatively cheap. That may be a reason to favor gold mining stocks over the precious metal itself at the moment. However, there are also reasons to still opt for physical gold. Not only is the gold price less volatile, physical gold also has far fewer risks. Investing in gold mines involves numerous risks, whereas physical gold has no counterparty risk. Gold Coins and Gold bars are therefore more suitable as store of value, While gold mining stocks can be of interest to investors who are willing to take on more risk.

This contribution was made from Geotrendlines