Gold Mining Stocks Suck

Gold +50% since 2011, miner stocks down 50%...

THIS IS a response to an article on gold stocks I read, writes Gary Tanashian in his Notes from the Rabbit Hole.

Be aware that the writer, at Gold-Eagle, does have 22 years of fact, of proof on his side.

His argument is that gold stocks suck, to put it technically. Those 22 years of ignominy are not to be taken lightly.

In his Gold Stocks: Fantasy vs. Reality, Kelsey Williams points out what all gold bugs know: How bloody terrible the miners have performed vs. their product.

So this response is not criticism. It is, however, a response with more color than just the cold hard historical facts.

Our all-everything chart shows the fact of the matter. I am not going to over-talk it. For that you can reference Friday's article on the subject. But the ratio between the HUI Gold Miners stock index and the price of gold itself has been Ignominy-Central since 2004 and, as I noted in my article, that is for good reason.

Gold miners should have under-performed, given the macro we had. And they did.

Now, I have no bone to pick with Mr.Williams, but his article appeared just after mine, which presented the potential of a view opposite his. So why not check his assumptions?

He starts off noting the period I noted, as well. That was 2001-2004.

"Alas, that three-year period of super success for gold stocks compared to gold was followed by 22 years of declining performance, thus far.

"The current gold stocks-to-gold ratio is 0.11, just slightly above the 0.10 mark touched in 2024, and prior to that in 2015.

"The reality of the decline in the ratio from 0.60 down to 0.10 is exacerbated by the fact that not only are gold mining stocks underperforming gold bullion on a long term basis, they are net losers over the past 14 years, even in the face of a sharply higher gold price."

Mr.Kelsey is giving us the history of it, which any committed gold bugs of that era know all too painfully well. What's more...

"Since the peaks for both gold and gold mining stocks in 2011, the gold price has increased by more than 50% ($1900 to $2900); whereas, gold stock prices have declined by 50%.

"As far as gold stocks being undervalued relative to gold bullion, well...of course they are. If they continue to underperform so drastically as has been seen, then how could they not be undervalued?

"Those who claim that gold stocks are undervalued mean that their prices have not gone up as much as expected, and, therefore, should increase substantially to make up for their failure to meet expectations. Good luck with that."

Again, history and the talk of gold stock bugs crying "value" is similar to when silver bugs cry "value!" because simply the Silver/Gold ratio is so depressed, based on distant historicals. That is not the way to measure value, so Mr.Kelsey is correct there as well.

'Cheap' is a better word than 'value' in these cases.

"There are a host of reasons to not own or invest in gold stocks, except on a short-term, very speculative basis.

"They are underfunded operations (in most cases), subject to a host of external risk factors including labor strikes, shut downs, nationalization, etc. The biggest risk factor for most investors is the continuation of historical long-term underperformance, coupled with the risk of outperformance on the downside.

"The biggest declines in gold stocks come when gold and/or stocks in general fall precipitously. That has been shown clearly with gold stocks versus gold 1980-2000; and with gold stocks versus stocks in general (most recently in 2020 and 2022).

"Earlier this year, I included gold stocks on my list of five investments to avoid in 2025. The reason for that warning is that I believe the risks outweigh the potential rewards. I still do.

"If anything has changed, it is that the risks are greater now than at the time I wrote the article."

Again, he is citing what has been. He cites facts. These are facts I have been aware of for many years. Gold stocks sucked for a majority of the 2004-2024 period.

Where I take issue is that he extrapolates the 2001-2022 macro into the future. There are no macro-fundamentals mentioned. No major chances in the macro backdrop. No conditions like gold now strongly out-performing the cyclical macro since 2022.

For most of the 2004-2024 period this was not the case and hence, gold stocks had leverage alright; negative leverage.

However, I am not a robotic or automatic thinker. I am a rational and hype-averse thinker, but not set in stone with it. I am also a "what if?" thinker. As in, what if the blow out in the 30-year US Treasury yield "Continuum" which I have watched for years actually meant something as I thought it did at the time (2022) and still do?

What if it meant an end to the era of inflationary Fed policy AKA business-as-usual, circa 2003-2022...?

What if that, in combination with the 2001-2004 factors shown on my first chart above and in Friday's article 2001: A Historical Odyssey For Gold Stocks, we have a macro suited to that most unexpected of occurrences, an out-performance by gold mining stocks vs. their product, developing?

If this happens it will have taken the investing world by surprise, as Mr.Kelsey's article implies. If it happens as I think it very well may, it could be for another short 3-year phase or something longer. I do agree that gold mining positions should always be trades rather than investments. But a trade can last days and great trade can last years.

An interim caveat to my view would be if the broad markets tank bearish for real and the gold bugs flip and lead the tank-o-rama. That is another past fact as illustrated by Kelsey Williams. So there are risks. There are always risks in all investments.

But risk vs. reward is a thing too, and I like the RvR in a sector that almost nobody thinks will ever perform and yet has ever more beneficial macro-fundamentals developing behind it.

The bottom line is my response is written by someone who abhors those who week after week, year after year have written bullish things about gold stocks. They are what we call promoters. Cheerleaders.

But I have presented facts of my own that lend color to the situation. Color that asks us to at least try not to be on autopilot where a potential big winner of a trade is concerned.

I have shown reasons why it could well be different this time. Fundamental reasons. The HUI/Gold ratio has not yet gotten off the ground, but it is something I am watching for.