Buy gold or gold miners? You don't have to dig deep to hit paydirt.

By Mark Hulbert

Why gold-mining stocks look set to outperform physical gold

Gold bullion - physical gold (GC00) - has outperformed gold-mining company shares over the past three years by one of the largest margins in decades. Gold recently hit a new all-time high above $2,200 an ounce, while the PHLX Gold/Silver Index XAU is below where it stood three years ago - as you can see in the chart below.

This is good news for gold-mining shares, since historically they have performed well following periods in which they have significantly lagged bullion.

To analyze the historical tendencies, I looked at what happened in the wake of past occasions when there was a significant divergence between gold and gold-mining shares (represented by the XAU index). I focused on data back to the mid-1980s.

Two major patterns stood out. The first is perhaps less surprising: Divergences eventually resolve themselves. That is, the long-term trends of both gold and gold mining shares are similar. This makes sense, since gold-mining shares are leveraged bets on the price of gold. So when the trends diverge it is a good bet that it's no more than a short- or intermediate-term phenomenon.

My second finding is that the resolution of divergences occurs primarily by the gold-mining shares performing particularly well or poorly. For gold bullion, in contrast, I could find no statistically significant pattern of how it performs in the wake of divergences between gold and gold-mining shares.

What this means: Following periods when gold shares have outperformed bullion, the divergence is more often than not overcome by the shares performing poorly rather than gold bullion performing well. Similarly, in the wake of periods in which gold shares have lagged gold, as they have done over the past couple of years, it's the gold shares that tend to perform well rather than gold performing poorly.

This narrowing of the divergence may have already begun. Over the past month (through March 20), the XAU index gain has been double that of gold bullion - 12.5% versus 6.3%, respectively.

The bottom line? If you want to bet on gold in coming weeks and months, you may want to favor gold-mining shares over gold bullion. The largest exchange-traded fund that invests in these shares is VanEck Gold Miners ETF GDX. For an even more leveraged bet on gold-mining shares, consider VanEck Junior Gold Miners ETF GDXJ.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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-Mark Hulbert

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03-26-24 1459ET

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