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

Company Price on
12/29/1978
Sept. 1980
Peak
Return
Campbell Lake Mines $28.25 $94.75 235.40%
Dome Mines $78.25 $154.00 96.80%
Hecla Mining $5.12 $53.00 935.20%
Homestake Mining $30.00 $107.50 258.30%
Newmont Mining $21.50 $60.62 182.00%
Dickinson Mines $6.88 $27.50 299.70%
Giant Yellowknife Mines $11.13 $39.00 250.40%
AVERAGE 322.50%
Gold 214.00%

 

This wasn’t the only time gold stocks soared…

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Bonner and Partners

Bill Bonner founded Agora Inc. in 1978. Since then, it has grown into one of the largest independent newsletter publishing companies in the world. Bill also co-wrote two New York Times bestselling books, Financial Reckoning Day and Empire of Debt, In his latest book, Hormegeddon, Bill describes what happens when you get too much of a good thing in the sphere of public policy, economics and business. This new newsletter is unlike anything else published in America today. Now in this industry, Bill Bonner has agreed to share his secrets and insights every month. It’s like having a super-wealthy uncle share his best ideas, insights and wisdom about business, relationships, investments, trends, developments, ideas and more.