A Perspective on Gold vs. Gold Mining Shares

10/23/2015 6:00 am EST

Focus: COMMODITIES


In this video, Bob Stokes, of ElliottWave.com, refutes the assumption that being bullish on gold means that mining shares will rise right along with the metal itself. Bob suggests that if you figure gold is going to rise, the best bet is to buy gold, since mining shares add an extra dimension of complexity to the matter.

Editor's note: You'll find a text version of this story below the video.

Some investors assume that being bullish on gold means that mining shares will rise right along with the metal itself.

But this assumption can be hazardous to your portfolio.

Let’s go back to October 2011, shortly after gold peaked. Robert Prechter showed this chart at the New Orleans Investment Conference.

chart
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The chart shows that gold mining shares made no net progress, even while gold doubled in price from 2007 to 2011. We saw this as bearish. The November 2011 Elliott Wave Theorist cautioned subscribers:

  • Precious metals mining stocks have gone nowhere since early 2008, despite a doubling in the price of gold. This pronounced lack of participation is akin to that of the summer of 1980. That year, gold stocks made a new high in September while bullion peaked at $720, significantly below the previous peak at $850. When after a long period of strength a major component of a market fails to keep up with another, it often signals an impending reversal in the complex as a whole.

Let’s now look at an updated chart from the August 2015 Theorist:

chart
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  • The chart shows what has happened since: a staggering 81% decline in the XAU [gold mining share index], which is much more than the 44% decline in gold and even more than the huge 71% decline in silver. Look at the chart and realize that the XAU is nearly back to where it was when gold was making a bottom near $250/oz. sixteen years ago. Gold is still over four times higher than it was then, but mining shares are about unchanged for the entire period.

The XAU is even down 72% from its 1980 peak.

The Theorist explains how this can happen:

One big reason gold mining shares have fallen so far is that mining companies borrowed money along with everyone else. Now they are burdened with interest payments and have to produce more gold to pay off their debts. When you buy a share of a gold mine, you own a share of what the company owes.… If you figure gold is going to rise, the best bet is to buy gold. Mining shares add an extra dimension of complexity to the matter.

By Bob Stokes of ElliottWave.com

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