About That Gold Miners Vs Gold Bullion Trade

Remember about 6 weeks ago when I wrote that post on confirmation bias, where I mentioned a trade that everyone seemed to love: long $GDX (gold miners) vs short $GLD (gold bullion)?    One easy explanation for the underperformance of miners vs. metal was the creation of ETFs that made it easy for investors to get exposure to bullion prices without messing around with the miners.

Well today, finally, thanks to Bron Suchecki, I found an even better explanation:  the smaller miners’ values have NOT underperformed gold prices (stay with me) – because we’re all looking at the wrong metric.  It comes down to a simple concept:  price vs value.  As John Paul Koning @ Pollitt & Co. explains in his research report, the price of the gold mining shares have lagged, but that’s because they have been issuing massive amounts of stock!  In other words, simply, the value of Koning’s selected index of Canadian gold mining shares has outperformed the price of gold bullion! (the value of the large international miners in the GDX has still underperformed the price of gold bullion).   Koning writes:

“While the price of the average share in the Canadian-11 has underperformed gold, the increase in their combined market cap has almost doubled that of the metal. While the average international miner’s market capitalization is still underperforming gold, this market cap is still increasing twice as fast as the average international miner’s share price.”

Unfortunately, Koning does not provide a time chart of “market cap” vs “gold price,” rather, only a chart showing the total change in each over the time period:

We can see that the price of gold has indeed outperformed even the value of the larger international gold miners (like the ones in $GDX), but not nearly to the same degree as gold has outperformed the price of those same shares.


disclosure: I am long $GDX and short $GLD

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