Why Bullion is Outperforming Mining Stocks
But it doesnât have to be an either/or decision
As published in Resource World Magazine - June 2010
By Nick Barisheff
If the investment choice is between mining stocks and physical bullion, it is essential to remember that these are different asset classes with entirely different risk/reward attributes. Mining stocks and bullion perform quite differently when the global economic environment is in turmoil, as is the case today. Banking crises, trillion-dollar deficits and the accelerating depreciation of many of the worldâs major currencies do not create positive conditions for equity markets, which is why investors are fleeing to the safety of physical bullion.
Bullion is a safe haven during turbulent times
This flight to bullion was confirmed during the stagflationary 1970s. Figure 1 shows that while Homestake Mining, the shares of the largest North American producer at the time, increased by an impressive 800 percent during the 1970s, physical gold increased by 1,500 percent, during that same time period. While it is true that many junior mining companies outperformed both bullion and Homestake in the 1970s, producing impressive returns for their shareholders, many other juniors faded into obscurity, resulting in painful losses. The volatility associated with junior mining companies versus blue chip producers and physical bullion makes them a purely speculative choice. However, if you have a high risk tolerance and a good advisor, then a small allocation to junior mining companies may be appropriate, especially those with established ounces in the ground. Juniors with a new discovery can generate substantial capital gains, but they are still highly speculative investments and can be very volatile.
Bullion outperforms mining stocks during financial crises
While mining stocks can generate impressive returns during an uptrend in precious metals prices, they do not outperform bullion during times of crisis, as in the financial meltdown of 2008, for example. Figure 2 shows the relative performance of the XAU mining index against gold bullion. When global economic conditions deteriorate, investors inevitably seek a safe haven for their wealth, rather than more speculative investments. As can be seen in Figure 2, gold maintained its strength throughout the turmoil, even as financial markets and mining stocks (as represented by the XAU Index in purple) declined.
