FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 17 August 2016

What Surging Mining Stocks Mean For Metals Markets

from Money Metals Exchange

-- this post authored by Stefan Gleason

Gold and silver mining stocks have embarked on a rally this year that could prove to be one for the record books. The leading exchange traded fund for the sector, VanEck Vectors Gold Miners (NYSE:GDX), shows an incredible 125% year-to-date gain. That far out-surpasses the 27% and 44% advances of gold and silver spot prices, respectively.

What does the mining stock run-up suggest about the fundamentals for the actual mined product, physical gold and silver?

Overall, it suggests that investors and industry insiders are optimistic about the prospects for higher metals prices. The mining shares tend to lead the metals in major moves up or down.

One prominent silver bull is Keith Neumeyer, CEO of First Majestic Silver Corp. (AG), which is one of the world's only true primary silver producers. As Neumeyer explained in a recent interview with Money Metals, silver supplies are scarce. He said:

"We've been in a deficit for multi decades now. The above ground supply of the metal is very, very low. It's actually at historic lows."

Top Silver Mining CEO Sees Silver Outperforming Gold by Factor of 7

Neumeyer notes that silver is being mined at a rate globally of 9 ounces for every 1 ounce of gold. Yet it currently takes 68 ounces of silver to buy an ounce of gold in the spot market. First Majestic's CEO is betting that the gold:silver price ratio will over time move toward the 9:1 mined ounces ratio. That implies a HUGE outperformance in silver prices going forward.

So far this year, silver is outperforming. But it's the silver and gold equities that are exhibiting the biggest gains. A big reason for the explosive gains in mining stocks this year is the fact that they crashed in the preceding four years to reach levels of extreme undervaluation versus the metals they mine.

Gold Mining Stocks vs Gold BullionThe risks entailed by owning mining companies instead of the metal itself are far greater. The upside potential in the stocks is also greater than in the bullion. But actual real-world returns going back decades show that gold has delivered superior risk-adjusted returns and better absolute returns than gold stocks. The price of the physical metal is also less volatile.

The GDX gold miners ETF has been around for more than 10 years. Over the past 10 years, it has produced a net return total of -15%. GDX is still in negative territory even with the massive run up seen this year.

By contrast, silver prices are up 67% over the past 10 years (despite being well off their 2011 highs). Gold prices show a more impressive 109% rise for the decade.

Gold Has a Substantially Better Risk-Adjusted Performance Than Mining Stocks

Bullion and mining stocks are entirely separate asset classes with entirely different risk characteristics. One widely used measure of risk-adjusted returns is the Sharpe ratio. It measures "the average return earned in excess of the risk-free rate per unit of volatility," according to Investopedia. Basically, the higher the Sharpe ratio, the better the risk-adjusted performance.

The trailing 10-year Sharpe Ratio for GDX comes in at a dismal 0.14, according to Morningstar. For the leading gold price tracking ETF, SPDR Gold Shares (NYSE:GLD), we get a much improved Sharpe ratio of 0.42. That makes gold very competitive with the 0.50 sported by the S&P 500.

Of course, gold spot prices as reflected in an ETF (whose returns are degraded by annual expenses), are not synonymous with gold bullion coins. An ETF is a financial instrument that carries counter-party risk and other risks that are not fully reflected in its Sharpe ratio. Gold bullion coins are tangible assets that have aesthetic qualities and utility that ETF shares don't. Coins can also potentially acquire scarcity premiums above spot prices in an environment of retail shortages.

At present, the retail market is well supplied when it comes to virtually all bullion products. But supply deficits in the larger physical precious metals markets, particularly for silver, are on track to grow.

The recovery in the mining sector won't immediately translate into ramped up output. Mining company executives who decide to invest in new capacity today may not be able to actually achieve new production levels until years from today.

At some point, mining investors will get carried away, the sector will be beset by malinvestment and overinvestment, and the boom will turn to bust. That's how it has always played out in this notoriously volatile sector.

Given that the current recovery off a brutal four-and-a-half-year bear market in miners is only seven months old, there could be a lot more boom to go before the next bust. Those who wish to speculate in shares could make fortunes - but they also run the risk of giving back all their gains if they wait too long in the cycle to get out.

Fortunately, investors can take the cues provided by the mining sector to position themselves in a less risky, more solid asset class: physical precious metals.

About the Author:

Stefan Gleason

Stefan Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal,, Seeking Alpha, Detroit News, Washington Times, and National Review.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Metals Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Precious Metals


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
Comments on Feyerabend’s ‘Against Method’, Part II
Comments on Feyerabend’s ‘Against Method’, Part III
News Blog
Mom Breaks Down In Tears When Son With Autism Meets Service Dog
Rail Week Ending 15 October 2016 Paints A Negative Economic View
What Is The New Normal For U.S. Growth?
Affordable Care Act And Its Effect On Part-Time Employment
The Speed Of Filling Jobs Is Declining
First Working Eggs Made From Stem Cells Points To Fertility Breakthrough
Infographic Of The Day: Mega Machines
Online Platforms Double Down On TV Programming
A History Of Mars Missions
How Tesla Out Innovates Traditional Carmakers
Schiaparelli's Descent To Mars In Real Time
September 2016 Existing Home Sales Still Not Excellent
September 2016 Leading Economic Index Improves Indicating Moderate Growth Ahead.
Investing Blog
Options Early Assignment - Should You Worry?
The 401k Plan Manager 17 October 2016
Opinion Blog
Prop. 51 Versus A State-Owned Bank: How California Can Save $10 Billion On A $9 Billion Loan
Obama's Middle East Policy Has Been A Complete Failure - Or Has It?
Precious Metals Blog
How Will The Election Outcome Impact Precious Metals?
Live Markets
21Oct2016 Market Close: Major US Indexes Close Flat On Low Volume, Crude Prices Resume Climb, US Dollar Stabilizes In Mid 98 Handle, Yes, Most Investors Are Worried Which Way This Market Will Go
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

Crowdfunding ....



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved