The gold stocks have underperformed Gold for almost 20 years so it is extremely difficult to imagine they could outperform Gold.
There are three reasons for the underperformance, but with Gold’s major breakout, two will evaporate.
One reason for the underperformance is the introduction of Gold ETFs (like GLD) in the mid-2000s. Before Gold ETFs, the majority of investors could only gain exposure to Gold through individual gold stocks. This reason remains in effect.
A second reason is that Gold and Silver have been in a secular bear market since 2011. The Gold price has remained essentially unchanged for over a decade, while the silver price remains well below its 2011 peak.
Finally, cost inflation over the past four years has taken a big bite of margins.
However, gold stocks are in a much better position now that Gold has broken out of its 13-year cup and handle pattern and likely started a new secular bull market.
We plot Gold, GDXJ, and the HUI in the chart below.
GDXJ is constructed from the MVIS Junior Gold Miners Index, which has data from 2004. I extended the index back to late 2002 with data from an old index of 15 companies.
The blue lines mark the start of breakout moves in Gold.
In the next chart, we plot Gold and GDXJ against Gold and GDXJ. The yellow marks the outperformance of GDXJ against Gold following Gold breakouts.
Most gold stock indices (HUI, GDM, etc) peaked against Gold in 2004, but GDXJ did not peak against Gold until 2007.
Think of gold stocks and junior gold miners as an option on Gold.
They outperform Gold after major breakouts in Gold and after significant rebounds from extreme oversold conditions ala 2008, 2016 and 2020.
As Gold’s upside potential slows or reverses, gold stocks and junior gold miners will underperform Gold.
Gold is only days past potentially its most significant breakout in 50 years. Should the breakout hold, we should expect gold stocks, especially junior gold stocks, to dramatically outperform Gold over the next year or two.
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