Precious metals investors generally invest in equities or bullion before considering investments in sophisticated structures like derivatives. For gold investors, the performance between gold equities and gold bullion has varied over the years. More recently, every 1 percent rise in gold stocks has averaged a 2 percent rise in gold bullion. It turns out that equities generally lag bullion in terms of performance.
Investors got a reality check when the financial crisis of 2008 surfaced. It was a wake-up call for all those who believed that the equities bull run was here to stay. Savvy investors who understand market cycles, especially the relationship between financial markets and precious metals were able to move their investments into better performing structures. Equities were never the best performing asset class starting 2007 and onwards. So in uncertain market conditions, investors moved to much safer asset classes like government bonds and precious metals.
In 2011, as the European debt crisis deepened, investment funds flowed out of equities at an even faster pace entering the precious metals market. So in 2011 the performance difference between gold equities and gold bullion was abnormally high. Gold stocks lost close to 16 percent whereas gold bullion rose nearly 30 percent. In somewhat normal market conditions the performance gap would be a lot less.
Historically, because of optional gearing, gold stocks have always outperformed gold bullion when the market is rising. In a bullion bull market, mining firms would have fixed or semi-fixed costs but also have a revenue stream that is rising. So a 3-to-1 leverage over gold price would be expected. However, the gap between gold bullion and gold stocks is as high as 30 percent in favour of bullion with most funds at least 10 percent behind.
Gold stocks, managed funds and indices are all managed differently. Miners and funds did outperform gold bullion between 1996 and 2001. Even three years ago, equities outperformed bullion. For example, the US Global Fund has outperformed gold by 154 percent in three years but is 24 percent behind in the last 12 months.
Investors looking to pick between gold stocks and gold bullion would be better off going for the metal especially if the investment focus is a long-term one. There are those specific times, however, when the equities market does well and gold stocks out perform the bullion market.
As a precious metals investor, it is essential to understand the relationship between precious metals mining stocks, funds, and the bullion market.
How to pick the best precious metals mining stocks? To learn more, visit our exclusive Precious Metals Training section at Trade Precious Metals.