The relationship between gold and the general stock market is complicated because gold mining stocks are not a homogeneous group. For example we could subdivide gold mining stocks into the major producers, the junior gold miners, and the gold explorers. Even within these subgroups, individual miners will behave very differently so remember that this analysis is only a generalization. Let’s start by looking at the performance of these subgroups over the last few decades.

Gold producers

Australian gold producers index (Source:

The chart above shows the Australian gold major producers index dating back to 1985. What we can see from this graph is that the index has been very volatile. Generally there is sideways movement over the larger timescale and currently we are at the bottom of the trading range.

Junior gold miners

Australian junior gold miners index (Source:

The above chart shows the Australian junior gold miners index dating back to 1992. This index has clearly not fared well compared to the major gold producers. Again, there is a lot of volatility but the general direction of movement has been in a downtrend and since around 2013 price has pretty much flatlined.

Gold explorers

Australian gold explorers index (Source:

If you thought that the junior mining index looked bad, take a look at the above chart which shows the Australian explorers index which has been totally crushed over the years. This index is about as close to zero as you can get!

The pattern of gains by gold miners in a bull market

In general, during a big gold bull market, the gold producers tend to rise first, followed by the junior gold miners, and finally the gold explorers. The gold explorers tend to outperform the junior gold miners, which in turn tend to outperform the gold producers. Indeed, the gold explorers going parabolic would likely signal a market top.

Comparing gold, gold miners and S&P500

Gold price (orange), HUI index (blue) and S&P500 (bars)

The chart above compares the S&P500, HUI miners index, and the gold price over the last 20 years. In the early 2000s we can see that there was actually an inverse correlation between the stock market which was declining and the gold miners and the gold price, which were increasing. However at around 2003 that relationship actually flipped and so all were rising together and they also all fell together in 2008. Interestingly if we look at 2008, the stock market itself declined 58% in total from peak to trough, whereas the peak to trough gold price decline was 34%. In contrast, the HUI index dropped a whopping 71%. When the gold miners fall, they fall really hard but on the flip side when they rise they rocket upwards. If we eyeball this chart this would suggest that the mining stocks are influenced more by the gold price than the stock market but is this indeed the case?

HUI correlations with gold and S&P500

Let’s look at these relationships more objectively. The chart above shows the hui index on the monthly scale and below in orange is the correlation coefficient to the gold price. The important thing to note here is that on the monthly scale the correlation is always positive, meaning that both the gold miners and the gold price move in the same direction. The correlation is usually weakest when the gold miners drop in price but that’s not always the case. If you look at this correlation on the weekly or daily scales then you do see the occasional dip into a negative correlation but it’s not common and it’s usually very short-lived. In blue is the correlation with the S&P500 and you can see that this is all over the place spending similar amounts of time in positive and negative territory.

Overall this confirms our idea the gold price is a far more important driver of the gold miners than the stock market is.

HUI to S&P500 ratio

Another way of looking at this relationship is to look at the ratio of these two variables. The chart above shows the HUI to S&P500 ratio on the monthly scale dating back to the late 1990s. Downwards movements on this chart mean that the stock market is outperforming the gold miners whereas upwards movement means that the gold miners are outperforming the stock market. This ratio has remained very low over the past few years and the lows that we saw recently are approximately a tenth of the what the highs were. We don’t know how long this is going to go on but it is interesting to note that the last time we were at such low levels of this ratio was in the early 2000s. Could this be a double bottoming process?

TSX gold stocks to S&P500 ratio (Source: The daily gold)

The chart above shows the ratio of the TSX gold index to the S&P500 on a log scale dating all the way back to the 1920s. Overall it shows that we have been in a long-term downtrend for the gold miners versus the stock market. Major lows in this ratio were made in 2001 and in 2015. How much lower can this ratio go? The downside seems much smaller than the potential upside.

Gold mining stocks during deflation

Homestake mining and gold price in the great depression (Source: goldchartsrus)

What is the effect of a further stock market decline and deflation on gold mining stocks? The above chart shows the Dow Jones index (blue line) during the great depression and this is compared to the Homestake mining stock price (green line) and the gold price shown (yellow line). Remember that at that time the gold price was fixed the first thing to notice is that during that first phase of the crash there was also a large drop in the price of Homestake mining. The stock price subsequently recovered quite sharply but then dropped off a little bit and flattened out. As the second phase of the crash progressed, the Homestake mining share price increased and interestingly this actually accelerated significantly only when the bottoming process occurred in the stock market.

BGMI and DJI ratio to currency in circulation

This is a very fascinating chart that relates the gold mining and stock market indices to currency in circulation. The horizontal green line is at the number one value and when the plot is above the line, that suggests that the index has risen above increases in the US currency in circulation. Interestingly the Dow Jones index has remained below this line for over 80 years. Thee blue line shows the Barron’s gold mining index to currency in circulation ratio has risen quite steeply on a few occasions but over the last 30 years has remained below the green line. The red triangles indicate triggering events for bull markets in the Barron’s gold mining index. At the time of the first triangle the federal reserve had actually extended a massive 200 million dollar line of credit to the Bank of England and also ignited the roaring twenties stock market boom. As we saw in the previous chart, this triggered an initial rise in the gold miners but that only really got going after the stock market had deflated. The second triangle represents when there were increases in currency in circulation which started a run on the US gold reserves. The third triangle represents Alan Greenspan’s reinflation policies after the bursting of the dot-com bubble. Again we can see that the gold miners were at historic lows here.

Overall what can we conclude from this? First of all we know that gold mining stocks are at historic lows, not only relative to the gold price but also relative to the stock market, and relative to the currency in circulation. It therefore seems that the upside is far greater than the downside, making it an asymmetric bet. We can also conclude that the gold price seems to be more important in influencing the price of the gold miners than the general stock market. It is also important to remember these are very highly volatile stocks and so the although the upside can be huge, so can the downside. The other thing that we have learned is that currency in circulation does matter and this is particularly relevant in the current situation.