Can gold stocks significantly outperform gold?
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Gold stocks have underperformed gold $Gold - main 2404(GCmain)$ for nearly 20 years. If someone tells you now that gold stocks are poised to significantly outperform gold, you'd probably think they're crazy, because it seems like an unimaginable scenario.
But that's exactly the mindset that rational gold investors need to break.
Mindset inertia can help us make quick decisions, reduce cognitive load, and improve investment efficiency. But every coin has two sides. If we rely too much on mindset inertia, we'll lack flexibility when facing problems and easily fall into rigid ways of thinking.
But let's analyze the reasons for this mindset inertia first. There are three main reasons why gold stocks have lagged behind gold for so long. However, with gold prices making a significant breakthrough, two of these reasons will disappear.
The first reason is the emergence of gold exchange-traded funds (ETFs) after 2000. The listing of $SPDR Gold Shares(GLD)$ on the New York Stock Exchange in 2004 caused a stir in the market. Before that, most investors wanted to gain exposure to gold only through gold stocks, but with the emergence of various gold ETFs, these investment tools with unique advantages have had a powerful sucking effect on precious metal investment funds.
We all know that the rise in stock prices needs to be driven by funds. Less funds mean less momentum for stock prices to rise. So far, this impact of gold ETFs on gold stocks still exists.
The second reason is market trends. Since 2011, both gold and silver have been in a long-term bear market, with gold prices basically staying flat for more than a decade and silver prices still well below their 2011 highs.
Thirdly, over the past four years, cost inflation has significantly eroded the profitability of gold producers. For most cyclical stocks, business performance improves when commodity prices rise, and stock prices also tend to start a rising cycle. But gold stocks have been the exception during this period. The rise in gold prices hasn't translated into corporate profits, and there's been no rise in gold stock prices.
However, given that gold prices have broken out of their 13-year cup-and-handle pattern and are likely to start a new long-term bull market, gold stocks are poised to turn a corner.
Historical data shows that after gold prices break out, gold ETFs such as $VanEck Junior Gold Miners ETF(GDXJ)$ and the Amex Gold BUGS index outperform gold. In 2008, 2016, and 2020, gold prices experienced significant rebounds and breakthroughs after extreme overselling, and subsequently, gold stocks, especially junior gold miner stocks, outperformed gold.
Now, gold prices may have just experienced the most significant breakthrough in 50 years. If the breakout is valid and sustained, we can boldly predict that gold stocks, especially junior gold stocks, will significantly outperform gold in the next one or two years. In 2004, when the ratio of most gold stock indices (such as HUI and GDM) to gold peaked, the ratio of GDXJ to gold only peaked in 2007.
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