The gold miners’ stocks remain deeply out of favor, largely shunned by traders. Since this sector just spent the better part of a year grinding sideways, such bearish sentiment isn’t surprising. But with a giant technical formation nearing a major inflection point, things look to be coming to a head in gold-stock land. A big breakout is nearing, and gold stocks’ deep undervaluation relative to gold argues it will be to the upside.
Every investor’s portfolio should always include a core position in gold bullion. As a rare asset that tends to move counter to stock markets, gold acts like insurance. It rallies strongly when stocks and bonds are falling in serious corrections or bear markets, mitigating overall portfolio losses. Gold certainly has risks of its own, but they pale in comparison to the additional layers of risk heaped on by gold-mining stocks.
Gold miners face major financing, operational, geological, and geopolitical risks that gold doesn’t. Even when gold is thriving on strong investment demand, individual gold miners’ stocks greatly underperform if their mines suffer troubles. Thus gold-mining stocks must offer ultimate returns well beyond gold’s own, to compensate investors for bearing these miners’ big additional risks stacked on top of gold’s own risks.
Miners’ gains do amplify gold’s underlying gains during gold bulls, as evidenced in the flagship HUI gold-stock index. Gold stocks’ last secular bull ran for 10.8 years between November 2000 to September 2011. During that span the HUI skyrocketed 1664.4% higher, driven by gold’s own parallel 602.9% bull market! That made for 2.8x upside leverage for gold stocks relative to gold, right in line with historical ranges.
This post was published at ZEAL LLC on June 9, 2017.