It is often said that gold mining stocks usually outperform gold in a bull market, but is this true and if so, by how much?

Gold miners to gold ratio

Barron’s gold mining index to gold ratio (Source)

The chart above shows the Barron’s gold mining index (BGMI) to gold ratio over the past 100 years. The green shaded area shows when the price of gold was fixed at $35 an ounce. The yellow shaded region is when gold was allowed to be traded on the market. Currently, it only requires just under half an ounce of gold to purchase one share of the BGMI. This is the same level as it was in the 1920’s!

On this chart, an upwards move means that the gold miners outperform gold. The higher the ratio, the more expensive the miners are relative to gold.

The exponential rise in the BGMI/gold ratio that occurred in the 1960’s is particularly interesting. At that time, the price of gold was fixed and gold investment was prohibited in USA. However, investment in gold miners was possible, and any rally in the miners would cause the ratio to rise since the gold price was static.

Interestingly, the BGMI/gold ratio peaked in 1969, a year before gold was free to rally. The ratio plummeted from 1969 to 1980 (i.e. the gold miners underperformed gold). In nominal terms, the BGMI rose from 231 to 736 (3 times) whereas the price of gold rose from $35 to $822 (23 times). Although both performed well, investors would have made a greater profit by owning gold rather than gold mining stocks during the 1970’s bull market.

The underperformance of gold mining stocks might be attributed to the preceding gold price suppression but note that since 1980, the underperformance has continued. Why?

Why have gold mining stocks underperformed gold?

  • Increasing energy costs
  • Declining ore grades
  • Introduction of gold ETFs

Energy costs

When both direct and indirect costs are considered, for the average miner, approximately 50% of gold production costs are closely linked to energy prices.

BGMI/gold ratio (top chart) and oil price in real USD terms (Lower chart)

A comparison of the BGMI/gold ratio chart to the price of oil in real US dollar terms shows that in general, rising oil price is associated with underperformance of the gold miners. The recent low oil prices have been good for gold and silver miners.

Oil price (bars) vs oil to gold and silver miners ratio (blue line)

The above chart compares the oil price (bars) and the oil to XAU ratio (XAU=gold and silver miners index). This confirms that when oil price rises, the ratio also rises, meaning that oil outperforms the gold and silver miners.

Going forwards, if we want to see the gold miners outperform gold, one important factor would be a low oil price. Any significant rise or spike in oil price would likely hold the miners back.

Declining ore grade

It is well known that ore grade has been steadily decreasing over time. The easy to mine, high grade deposits would have been mined early on.

Declining ore grade of gold mines

Ore grade is now one tenth of what it was in the 1970’s. Additionally, the lower the ore grade, the more energy is used per ounce of gold mined.

Gold ETFs

The mid 2000’s saw the introduction of gold ETFs, with the GLD created in 2004. Since the mid 2000’s the BGMI to gold ratio has fallen significantly. It is unclear whether gold ETF’s are a contributing factor, however it is conceivable that gold ETFs may have diverted investors away from individual gold mining stocks by offering leverage to the gold price without the mining risk.

Why could gold miners outperform gold?

On the flip side, what are the factors that could enable gold miners to outperform gold?

If the majority of other sectors are performing badly and investors are looking for a rising sector, gold miners may be a beneficiary.

Some sort of failure of gold ETFs when gold prices are rising may well prompt funds to be diverted towards mining stocks.

Also, never underestimate the power of sentiment and mania in pushing prices up rapidly.

The beta of gold and silver mining stocks

As discussed in previous posts, gold mining stocks are highly correlated to the gold price, meaning they tend to move in the same direction. Mining stocks also provide leverage, or beta. to the underlying metal.

The beta of gold mining stocks can be considered to be a measure of their sensitivity to the gold price and a high beta implies high volatility. When beta is 1, both assets move by the same percentage.

The average gold mining stock has a beta of 2 to gold, meaning that a 1% move in gold is associated with a 2% move in the gold miners in the same direction. These are simply averages and there will be individual mining stocks that have lower or higher beta. Also note that beta is not a static value, it changes over time.

GDX ETF’s beta to gold (blue line)

Since inception, the beta of the GDX (gold producers ETF) has ranged from a maximum of 2.84 to a low of 1.1.

GDXj ETF’s beta to gold

Surprisingly, the beta of the GDXJ (junior gold miners ETF) is lower than that of GDX, ranging from 2.3 to 1.0.

SILJ ETF’s beta to silver

The beta of SILJ (silver junior miners ETF) to silver is unsurprisingly higher, ranging from 3.0 to 0.8.

Duration of gold mining stock bull market

When considering the upside potential of gold miners, we must also consider time.

Gold miners bull market performance (Source: Incrementum)

If we label the start of the bull market in mining stocks at 2016, then it is already rather advanced. The above chart shows the timelines and performance of BGMI in multiple bull markets. In order to match the longest bull markets, the current bull market potentially has another 3 years to run. The greatest gains usually occur near the end of the bull market.


The oil price is likely to play an important role in the performance of the gold miners relative to gold and is a factor worth observing.

Just because the sector as a whole underperforms, that doesn’t mean individual miners will do so. For example, a miner that discovers a massive high grade deposit that is easy to mine will outperform.

Additionally, underperformance is not the same as poor performance. It is all relative.