Gold Stocks Outperform Gold: Breaking the Inertia of Thought

Canadian TSXV Gold Stocks Finally Gaining Momentum
Published on: Mar 18, 2024

In the past 20 years, gold stocks have consistently underperformed compared to gold. If someone were to tell you that gold stocks might significantly outperform gold in the near future, you would likely consider that person to be absurd. However, this is precisely the cognitive inertia that rational gold investors must overcome.

Forming Inertia of Thought Cognitive inertia helps us make decisions quickly, reducing cognitive load and enhancing investment efficiency. However, excessive reliance on cognitive inertia can lead to inflexibility when faced with problems and make us prone to rigid thinking patterns.

Analyzing the Formation of Cognitive Inertia There are three main reasons why gold stocks have trailed gold over the long term. However, with a significant breakthrough in gold prices, two of these reasons are poised to diminish.

  1. Introduction of Gold Exchange-Traded Funds (ETFs) after 2000
    • The advent of ETFs, such as the StreetTracks Gold Trust fund (GLD) on the NYSE in 2004, had a profound impact on the market. Prior to this, most investors seeking exposure to gold could only do so through gold stocks. However, with the emergence of various gold ETFs, this unique investment tool exerted a powerful suction effect on precious metal investment funds, impacting gold stocks’ performance.
  2. Market Trends
    • Since 2011, both gold and silver have endured prolonged bear markets, with gold prices remaining largely stagnant for over a decade, and silver prices still significantly lower than their 2011 peak.
  3. Erosion of Gold Producers’ Profit Margins due to Cost Inflation
    • Over the past four years, cost inflation has significantly eroded the profit margins of gold producers. Typically, when commodity prices rise, business performance improves, leading to a corresponding increase in stock prices. However, gold stocks have been an exception during this period. The rise in gold prices has not translated into company profits, thus impeding any potential increase in gold stock prices.

Anticipating a Turning Point for Gold Stocks Considering the breakthrough in gold prices after maintaining a cup-with-handle pattern for 13 years, it is highly probable that a new long-term bull market for gold will soon commence, potentially heralding a turning point for gold stocks.

Historical data indicates that following a breakthrough in gold prices, gold ETFs—such as VanEck Junior Gold Miners ETF (NYSE: GDXJ) and the Amex Gold BUGS Index—have exhibited stronger performance than gold itself. After extreme overselling leading to substantial rebounds and significant breakthroughs in gold prices in 2008, 2016, and 2020, gold stocks, particularly those of junior gold miners, outperformed gold.

Now, with gold prices potentially experiencing their most significant breakthrough in 50 years, if this breakthrough proves effective and sustained, we can confidently predict that gold stocks, especially junior gold stocks, are likely to significantly outperform gold in the coming one to two years. In 2004, when most gold stock indices (e.g., HUI and GDM) peaked in comparison to gold, the GDXJ-to-gold ratio did not reach its peak until 2007.

Funds Gold Precious Metals Silver