Gold Mining Stocks vs. Gold & Silver
Key Takeaways
- This page compares the performance of gold mining stocks (represented by the BGMI and XAU indices) to the price of physical Gold and Silver.
- Historically, physical gold has tended to outperform gold mining stocks over the long term.
- Mining stocks offer leverage to the gold price, meaning they can outperform gold during bull markets, but they also come with additional risks (e.g., operational issues, management decisions).
Mining Stocks vs. Gold & Silver Performance
Interpretation
The Barron's Gold Mining Index (BGMI) goes back all the way to 1939 — but unfortunately it is not updated automatically. The "Philadelphia Gold and Silver Index" (XAU) is an index of thirty precious metals mining companies and it goes back to 1983. Today, the XAU is THE benchmark for companies in the mining sector for precious metals. This comparative chart shows how the mining stocks perform compared to the metals that they produce. It demonstrates that over the long run — the physical metals tend to outperform the mining stocks.
Data Sources
- OnlyGold: Historical Gold prices
- Yahoo Finance: Recent Gold prices
- Macrotrends: Historical Silver prices
- Yahoo Finance: Recent Silver prices
- Yahoo Finance: XAU
- GoldChartsRus: BGMI (Barron's Gold Mining Index)
Further Information
BGMI to Gold Ratio
Interpretation
Measuring the BGMI in Gold (instead of dollars) indicates that gold is outperforming the mining stocks and that the ratio is going lower over time. Since the BGMI is not updated automatically, the XAU/Gold ratio is placed below.
XAU to Gold Ratio
Interpretation
The XAU/Gold ratio gets updated daily. However, it only goes back to 1983.
BGMI to Gold Ratio (including XAU)
Interpretation
This chart contains BGMI data before September 19th 2005 and XAU data thereafter. Doing so leads to an automatically updated chart that correlates very strongly with the actual BGMI/Gold ratio.
Correlation Between XAU and Gold
Interpretation
The chart above displays the 1-year rolling correlation coefficient between the price of gold and the Philadelphia Gold and Silver Index (XAU). A correlation coefficient of +1 indicates a perfect positive correlation, meaning that the price of gold and the XAU moved in the same direction during the specified time window. Conversely, a correlation coefficient of -1 indicates that they moved in opposite directions. The chart shows that the XAU and the price of gold tend to be positively correlated. The correlation coefficient is important for diversification because it helps investors assess the potential benefits of including the two assets in their investment portfolios.
Diversification is the practice of spreading investments across different assets to reduce risk. In his book Principles, Ray Dalio called diversification the "Holy Grail of Investing". He realized that with fifteen to twenty uncorrelated return streams, he could dramatically reduce the risks without reducing the expected returns.
Frequently Asked Questions (FAQ)
Why do mining stocks sometimes underperform the price of gold? Mining stocks carry risks that physical gold does not. These include operational risks (e.g., mine collapses, equipment failures), political risks (e.g., nationalization of mines), management risks (e.g., poor hedging decisions), and rising input costs (e.g., energy and labor). These factors can eat into a mining company's profitability, even when the price of gold is rising.
What does it mean that mining stocks are a 'leveraged play' on gold? Leverage means that a small change in the gold price can lead to a much larger change in a mining company's profits and stock price. For example, if a miner's cost to produce an ounce of gold is $1,500 and the gold price rises from $1,800 to $2,100 (a 16.7% increase), the miner's profit per ounce doubles from $300 to $600 (a 100% increase). This is why mining stocks can offer explosive returns during a gold bull market.
What is the difference between the BGMI and XAU indices? The Barron's Gold Mining Index (BGMI) is an older, historical index that is not updated automatically on this page. The Philadelphia Gold and Silver Index (XAU) is the modern benchmark for the precious metals mining sector. This page uses both to construct a long-term historical view.