Gold Miners’ Performance vs. Gold — Does It Say Sell Gold?

In Monday’s DecisionPoint Trading Room video, we were asked why we cover Gold Miners (GDX) as well as Gold (GLD). There are two reasons:

Some people prefer to own the commodity, Gold, and others prefer to own an operating company that benefits from the price of Gold, such as Gold Miners. For a profitable mining company, when Gold increases in value, most of the increase goes straight to the bottom line because cost of goods is already paid for.Other people prefer Gold Miners because they may pay a dividend, and typically they out-perform Gold by a lot. That applies to movement in both directions. That is to say, Gold Miners will typically go up faster than Gold, but Miners also go down a lot faster than Gold.

This morning, I heard a money manager who asserted that people who own Gold should be selling it because, while Gold has been making all-time highs, Gold Miners need to advance another +50% to equal its 2011 all-time highs. The chart confirms that, but there is more to consider in this regard.

Here is a performance chart comparing the two from the 2011 top to the present, and we can see that GDX has underperformed GLD by about half.

But let’s look at just the decline from the 2011 top to the 2015 lows. We can see that GDX fell at an accelerated rate, driven by the negative sentiment associated with GLD’s decline.

The chart showing the performance from the 2015 lows shows that GDX has out-performed GLD by a lot, as we would expect; however, GDX took a -45% hit in 2022 because of the securities bear market. Also, GLD had a rather tedious two-year sideways episode from 2020 to 2022, which would have been uninspiring to potential Miners investors. Nevertheless, GDX is still out-performing GLD by a considerable amount.

Conclusion: While the assertion that GDX underperformance since the 2011 all-time high justifies avoiding Gold, I think the premise does not consider all the evidence. Most important was the 2022 hit, which drove GDX down over -2.5 times more than GLD. That had less to do with Gold’s prospects than it did with general bear market panic.

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