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 have been badly stung because they believed that gold stocks would be the perfect hedge against the market crashing but this has not proven to be the case at all. Some investors have found that the price of their gold stocks has remained the same despite the price of the metal itself increasing by some 30 percent since early 2011.
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.
In somewhat healthier market conditions, gold stocks would do somewhat better than the gold bullion market. Mining firms would have access to liquidity in the form of debt or investment funds. As well, investors would have access to leverage in order to outsize their equity investments. But even considering these factors, gold stocks on average underperform the gold metal.
It is not to say that gold equities and funds have never outperformed the gold bullion market. In fact, between 1996 and 2001, gold funds and equities did well. For example, the US Global Fund out performed gold by nearly 154 percent in a three year span.
Therefore, underperformance when it comes to gold stocks is actually pretty normal. Even Barrick and Newmont, the two biggest gold stocks, and the best performing funds are way behind gold bullion when it comes to performance. In the last 5 years, gold stocks have seen a 1 percent rise for every 2.5 percent rise in gold. In the last 12 months, a 1 percent increase in gold stocks occurs with every 5 percent increase in gold bullion.
The key behind capitalizing on investment opportunities is to understand market and economic cycles. Every market out there goes through a bull and a bear run. Understanding these cycles help position investments in the right market at the right time.
Before you invest in the gold stock market, check out latest research and analysis on the precious metals equities market. As well, our analysts offer in depth analysis on the gold bullion market.
