Why Gold Stocks Perform Better Than Gold

Editor’s note: Today we have a special gold essay to share from Casey Report editor E.B. Tucker. As E.B. explains, gold stocks move in extreme cycles…and they’re currently preparing for the next boom.

And this boom may be the biggest we’ve seen in our lifetimes

By E.B. Tucker, editor, The Casey Report

You can make 5x, 10x, or even 27x more money in gold stocks than in gold bullion.

And the best part is that you don’t have to buy options, use debt, or perform any complicated trading strategies either.

And it only involves a little more risk than buying gold bullion. But the potential upside is massive…

Gold stocks aren’t much different than any other type of stock. They just happen to be shares of companies that produce gold.

These companies mine the ore that contains the metal and sell it to refineries. The process is similar to oil or any other natural resource in the ground.

The reason why gold stocks perform better than gold is simple: They offer leverage to the gold price. That’s why the returns can be spectacular.

The word “leverage” usually means borrowing. That’s not the case at all in the gold market.

If you aren’t familiar with the concept of leverage in gold stocks, here’s a quick example of how powerful it can be:

Say the price of gold rises from $1,300 to $1,400. That’s roughly an 8% gain. If you own physical gold, you’re up 8%.

Now, say a mining company owns a million ounces of gold in the ground, and gold is trading at $1,300. The value of the gold in the ground isn’t simply $1.3 billion (1 million ounces x $1,300/oz.). Instead, the gold in the ground is worth much less than that, because it will cost a lot of money to extract.

Say it costs the company $1,250 per ounce, all-in, to mine the gold. At a gold price of $1,300, the company has a potential profit of $50 on each ounce of gold.

However, if the price of gold rises only 8% to $1,400, the company’s profits per ounce increase by 200% ($1,400 – $1,250 = $150 profit per ounce). This small move in gold can cause the stock price to increase 40%, 50%, or more. This is why a small increase in the price of gold can cause a gold stock to soar many times that amount.

It’s happened before…

A History of Gold Market Booms

Below are the historical returns for gold producers during four separate cycles when gold boomed: 1979–1980, 1981–1983, mid-1990s, and 2001–2006.

These are not hypothetical returns. They are real.

First up, the king of all gold bull markets: 1979–1980…

Gold more than tripled during this period. But gold stocks more than quadrupled.

  Returns of Producers from 1979 to 1980
Company Price on
Sept. 1980 Peak Return
Campbell Lake Mines $28.25 $94.75 235.4%
Dome Mines $78.25 $154.00 96.8%
Hecla Mining $5.12 $53.00 935.2%
Homestake Mining $30.00 $107.50 258.3%
Newmont Mining $21.50 $60.62 182.0%
Dickinson Mines $6.88 $27.50 299.7%
Giant Yellowknife Mines $11.13 $39.00 250.4%
AVERAGE 322.5%
Gold 214.0%

This wasn’t the only time gold stocks soared…

From 1981 to 1983, gold producers returned over 70% on average. And this happened in less than two years.

Companies like Agnico Eagle and Campbell Red Lake climbed over 120%. And Sigma shot up 73%.

These profits stemmed from a mere 10.8% rise in gold.

There was another boom in the 1990s. The average gold producer went up more than 200%…

Cambior rose 124%. Kinross Gold returned more than 190%. And Manhattan skyrocketed over 760%.

All while gold only rose 8%.

Then another big boom hit from 2001–2006. This one rivaled the boom of the early 1980s.

Gold returned 158%, while the average gold producer gained over 400%.

Newmont shot up 270%. Gold Fields soared over 500%. And Goldcorp returned over 800%.

As you can see, an increase in the price of gold (even a small one) can lead to huge returns.

Gold Stocks Move in Extreme Cycles

You can make a fortune in the gold market. But you must understand market cycles.

Gold stocks move in extreme boom and bust cycles, more so than most other markets. Contrast that with “noncyclical” businesses, like those that sell toothpaste or laundry detergent. Demand for these types of everyday items is steady whether we are in a bull or bear market.

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