Why Gold Stocks Perform Better Than Gold
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/ounce). 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
|Campbell Lake Mines||$28.25||$94.75||235.40%|
|Giant Yellowknife Mines||$11.13||$39.00||250.40%|
This wasn’t the only time gold stocks soared…