Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Will Gold Shares Catch Up to the Gold Price?

Commodities / Gold and Silver 2010 Jun 19, 2010 - 07:24 AM GMT

By: Julian_DW_Phillips


Best Financial Markets Analysis ArticleGold share prices have not moved up in line with the gold price, why?

This has shaken quite a few investors, who based on past market moves, expect share prices to move roughly in line with the gold price in the belief that holding gold mining shares will produce the same if not more gains. It's time to look at the 'why' of this.

What is a Gold Share?

This is the most important question investors must ask of himself, when deciding what to invest in, in the gold world.

  • We have to recognize that a gold share is not gold. It is a share in a corporation that is involved with gold mining. There is no guarantee that the gold price being earned is going to feed through to the investor.
  • The gold mining company in terms of corporate risk, is no different than any other corporation. The risks involve employees, Directors, Unions, resources, production, cash flows, Dividend policies, to name some of the risks.
  • Now add to that market conditions [Bull or bear markets], liquidity of shares in the market [which may have nothing to do with the quality of the corporation] and price earnings ratios.
  • On the bright side, gold shares have the ability to perform better that gold itself for the good ones have a better profit capacity than the gold price [through profit margins] than gold itself.
  • The income to a gold mining company accrues by the quarter or longer, so it is reliant on the average gold price over the period, for its income.
  • There is no doubt that a carefully chosen gold mining share that performs well in a 'bear' market, does outperform the gold price over time and can be a better investment than gold itself [such as the shares we favor in this newsletter]

Gold itself

  • Gold bullion carries no corporate risk at all.
  • It is not dependent on people's efforts.
  • It has so many more aspects than shares in a mining company.
  • It is considered as the real money in many parts of the world.
  • It is considered as an important reserve asset by central banks.
  • It is unprintable.
  • It is a 'counter' to the risks inherent in currencies.
  • It is money, 'in extremis'.

Gold from a Fund Manager's point of view

There you are, a fund manager who wants to invest in gold. You look at the different options in front of you. Your task is to maximize total return on capital employed. But, you have to achieve this minimizing risk, as far as possible in the present investment climate. Unfortunately, the risk-reward ratio in today's investment climate is far higher than seen before 2007.

So now you look at gold bullion and gold shares. What points do you factor in? The first is that it is not one or the other, but can be both. Factors you would look at would include: -

  • In the eighties, the gold price shot ahead of gold shares when it flew to its peak at around $850, leaving the solid gold shares far behind. Is today a similar scene?
  • If not you would likely look at the biggest most solid gold mining shares out there, after all, they won't go bust easily? But are they likely to live up to the growth expectations of companies whose growth of production is rapid. As it is the majors are currently struggling to replace waning current production.
  • A company that is expected to grow income, irrespective of the gold price, promises to perform far better than a major.
  • As it is the risks in all markets are high, so you may well balance this against an expectation of a higher return. Good Juniors mining shares would likely fall into this category [see ours below in this newsletter].
  • There is no doubt about it, such shares would warrant the increased risk.

"In Extremis?"

Of course, gold itself would remove a tremendous degree of risk, as opposed to gold mining shares, in extreme times. Many investors in the past turned to the biggest and most solid gold shares to reduce risk, saying they won't go bust, but that's not what you look for as an investor, surely? So you would measure one of these reliable but underperforming big gold shares against gold itself? After all, holding gold for the same period as one of these would give a similar return, would it not? This is because a gold share should, over that time, reflect the average of the gold price over the same period? In this case, gold itself would offer less risk and over time be a better investment, on a risk-reward measure.

But big investors go for gold itself, for far more than its profit potential today. When you consider that gold will rise in value as times get worse, whereas corporate risks rise dramatically in such times [refer to mid + 2007], then gold's additional qualities take it into a category of its own, way ahead of most equities. That's why central banks hold it and that's why very big investors hold it.

So, Will shares catch up to the gold price?

The answer to such questions is never as easy as we would like, because the world is never simple. In fact, there are a series of answers:

  • In extreme times investors shy away from equities, so gold shares would not keep up with a rising gold price.
  • In inflationary times equities in general do rise, as does the gold price. In such a scene, gold shares will rise and perhaps outperform the gold price.
  • When deflation is hammering values, gold will rise but investor capacities are reduced, taking most equities down with them, including exerting a restraint on gold shares.
  • Should an environment exist that precipitate a government confiscation of gold, then international gold prices will rise, but gold price in that country will not. Should gold mines in that country have to receive a government 'Fixed" gold price, then those gold share will underperform international gold prices. Post 1933, this is what happened in the U.S.A.

So there is a place for both, in different economic scenes at different times. But one should require a good performance from good gold shares that will do well in bad times too.

What constitutes a good gold share?

Subscribers only

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules