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The Gold And Gold Miners Paradox Explained

George Kesarios profile picture
George Kesarios


  • Gold had an uptick over the past 12 months, but this is a function of a lower dollar.
  • Gold stocks have not rallied, because in local currency terms around the world, gold is mostly down.
  • Unless we see gold investment demand, gold will not rally, and miners as a sector will continue to underperform.

Gold stocks have performed horribly over the past 12 months - this despite the fact that gold (GLD) itself has been up by about 6% over the same period. The question is why?

Before we explore the answer, let me tell you I use gold stocks as a proxy for what physical gold might do. Reason being, gold stocks behave like regular stocks. Their price is a function of earnings, debt, EBIDTA and so forth. And because stocks are smarter than the metal, they can smell when gold is about to rally, and gold stocks front-run it (my opinion).

Gold on the other hand is simply a function of investor appetite for gold, for whatever reason. If investors buy into gold ETFs and bullion funds, then gold will go up. However it's totally arbitrary when, and why, investors buy gold.

The question, however, is: If gold stocks are a proxy for gold, and gold has been up by about 6% over the past 12 months, why are gold stocks down?

As the above chart depicts, the Philadelphia Gold & Silver Index (HUI) is down by about 7%, and ETFs like the Vaneck Gold Miners (GDX) and the Vaneck Gold Junior Miners (GDXJ) is down by about 5% and 14% respectively.

Well, the answer might surprise you. The answer is that gold is not really up by 6% since last year. It's up in dollar terms, but please remember that the dollar has been falling across the board over the past 12 months.

The U.S. Dollar Index (UUP) (UDN), a measure of the value of the U.S. Dollar relative to a basket of foreign currencies, is down 11% over the past 12 months.

So the

This article was written by

George Kesarios profile picture
I only look at stocks that have the possibility to double over a twelve month period and stocks in which the risk/reward ratio payout is high. In addition I focus on swing trade opportunities. I focus more on valuations and risk/reward metrics as opposed to what make companies tick. I have been a professional investor for over 20 years and during the past several years an economics analyst and financial writer for capital.gr, the biggest economic news portal in Greece. I have managed money from time to time and have also done some seed venture capital projects in the past.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (32)

You new pic like a punk lol
mmkkgg profile picture
The price point in gold is fast approaching where the market will realize the value in the gold miners.
Purple Rhino profile picture
Gold has risen around 25% since its bottom a couple years ago. And all this over a period of time when the Dow was breaking records, ie gold was supposed to be doing poorly. This is a reason to be bullish. As for golds stocks, the sector has been poorly managed and many people burned. They are skittish and waiting for bona fide surge in gold before jumping back in. But when they do, it will more than make up for it.
George Kesarios profile picture

Thank you

To all

I am not bad mouthing gold, please dont take anything personal. I am simply pointing to some facts as I see them.
11146471 profile picture
Kesarios is right. Most gold miners in the world mine gold outside the US and pay their costs in local currencies, while selling gold in USD.

So if their respective currencies got stronger vs Gold then their cost increased vs usd denominated gold ozs.

Take for example Canadian producers. CAD went up vs the USD so while gold went up in USD terms their mining costs in CAD were increased at a higher rate decreasing their gross profit.
insightful?informed decider profile picture
George , being long since 1999 in gold and silver , I have NO complaints I have never lost money and have not "underperformed" buy owning PM's. I have lost money on stocks though,and I have also overperformed on some. PM's is a nice alternative to paper assets ,no counter party risk involved.
literally every asset class is overvalued at the moment... precious metals is the only bargain left
Prezzo giusto profile picture
I would think there are real bargains in the energy sector too. Canadian E&P's whose share price is lower now than when WTI was trading at 30$/bl, nat gas producers...
Gunne profile picture

Everyone who is long gold must be out out of touch with reality, right? Do you think we are all doomsday preppers? :)

Ray Dalio has been buying quite a bit of GLD shares too lately, i guess he has his reasons and i guess most of the bulls on these boards have their reasons too.

I've been saying for quite some time now that i'm bullish on stocks AND gold.
In a scenario where central bankers are supporting the markets like never before, history suggests that it ain't a bad thing to hedge with some gold.


And hey, i certainly don't think gold will rally everyday, but at least gold isn't going down against most fiat currencies, right?
George Kesarios profile picture
listen, I really dont care who is long gold. However the truth is that whoever is, either lost money or underperformed. Gold will have its day, but not yet
Gunne profile picture
George, i don't know where you get your info, but what you are writing is just wrong.
First, you pick ONE currency, and claim that over the last 12 months gold in ZAR went down 6%.
This is not correct. Gold in ZAR actually was flat over the last 12 months.


Then, by mentioning this ONE currency, you claim that gold is mostly down in local currency terms around the world.
Again, this is just NOT true.

Since 2017, gold is UP against the most important currencies. (The SDR basket : USD, EUR, GBP, JPY, CNY)


And gold is UP against a basket of 20 currencies (Top 20 GDP weighted)


I don't know what the point of this article is, but anyway you look at it, it is very sloppy.
George Kesarios profile picture

Tell that to Ycharts

I dont think the article is sloppy. You guys in the gold camp have to come to reality. Gold will at some point rally and so will gold stocks, but please stop thinking everyday is its rallying
mmkkgg profile picture
What's a "Gold Currency Index? I assume the gold colored line is price of gold? What's the blue line?

In the last chart.
Gunne profile picture
The blue line is gold reflected in a basket of 20 national currencies (top 20 GDP), the gold line is in USD.
Interesting article. I think a lot of miner and junior miner volume has gone to cryptos. GDXJ are known for their volatility and quick returns if you do your homework. Along come crypto and 1,000x returns over night, along with the millennials who are crazed over these coins. No new money going In to Gold, it feels outdated. My portfolio is largely gold favored, mainly Junior miners. So I’m no bear, just shedding new light. Also, long many cryptos, as I think everyone should be. GL
Jeremy Robson profile picture
As most gold miners report revenue in dollars their p/e will go down as the dollar value of gold goes up. Eventually this will reflect in higher miners prices. The authors explanation does not seem right. I would expect that the gold miners have not gone up as gold has not managed to break any of the important resistance points. If it does then I think that the gold miners will go up and make up the under performance.
Next will be really interesting in the markets.
George Kesarios profile picture
If gold rallies yes, but the question is if investment demand will return so that it does.
In theory gold should rally quite a bit with Trump threatening to tax EU cars now. Usually what SHOULD be never pans out though. Also the italian elections today.
According to goldman sachs the investment demand is about 30% of total gold demand (IIRC) so it absolutely can and will rally when indians get richer by the year. US is completely broke and irrelevant in the gold market, they are selling their gold.
Thank you. Interesting article.
Thanks for the commentary.
Article and charts mention nothing of PBOC purchasing 3x the yr/yr volume of gold in 2017... German gold returned by the US and brokered by the Swiss. Charts also don’t reflect uptick in gold in India and Turkey resulting from fiat crisis. Otherwise how would one explain gold going from 1080’s up to 1280? The logic in this article doesn’t explain the price trend early 2017.
wald22 profile picture
Gold should not be looked at as an investment. It should be looked at as a savings vehicle.
insightful?informed decider profile picture
wald ,that me correct.I started "Saving" in 1999 when it was about $300 an Oz :)
RJJ1 profile picture
Why buy 1 oz of gold when I can buy 81 oz of silver for the same money. That is the way to go.
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