January 01, 2012
BY: Robert Hallberg, Topics: Gold, Silver, Gold and Silver Mining
Gold and silver mining shares offer leverage and should in theory outperform the physical metal in a bull market. Or at least that is commonly held belief among many precious metal investors. But according to historical data this is no always the case.
Although gold and silver mining shares have outperformed general equities in this bull market, they have not always outperformed gold and silver. While some gold and silver mining shares have had phenomenal returns others have lagged behind, and only investors who had the foresight to pick the winners were able to profit.
The Philadelphia Gold and Silver Index (XAU) and the NYSE Arca Gold BUGS Index (HUI) are the two most watched gold indices on the market. And they are composed of some of the biggest and best gold and silver mining companies in the industry. By the dividing the price of gold with these two indices we can compare goldâs performance against the shares.
The first chart shows the Gold/XAU ratio. Although there have been periods when the XAU have done better than the metal, gold has outperformed the XAU by 249% since its inception in 1984.
The next chart shows the Gold/HUI ratio. The HUI has done better than the XAU, but gold has still outperformed the index by 50% since its inception in 1996.
These two indices are composed of different senior gold producers and while there are several gold mining companies that have done better than gold itself, gold stocks in general have often lagged behind. The mining industry is capital intensive and one reason for the poor performance of mining stocks may have been because of the constant dilution of shares used to raise capital.
The next chart shows the performance of gold, silver, gold and silver mining shares and stocks in the S&P 500, since the beginning of the bull in market precious metals that started in year 2000. The chart shows that the HUI have outperformed gold and silver by a slim margin while the XAU is lagging behind.
The historical data suggest that gold and silver mining shares in general do not always outperform gold and silver. Given the inherent risks associated with mining shares, the easiest and safest way to participate in the ongoing bull market is simply by owning the metal itself.
If you do decide to invest in the gold and silver mining shares, picking the right stocks becomes ever more important. Finding âthe rightâ gold mining companies requires some research and due diligence on your part. It would be tragic to get the timing right on the gold bull market and still donât make money because your stocks failed to perform. There are several services you can subscribe to that help you do the due diligence and they actually visit the different properties. I personally prefer Casey Research International Speculator and Big Gold.
To learn about trends and spot the next investment opportunity read the Casey Report from Casey Research. It's a monthly investment news letter that breakdown economic trends in a way that is easy to understand. They make recommendations based on economic reality and their track record is several times better than the market or any mutual fund for that matter.
blog comments powered by Disqus