Gold stocks have notably lagged behind the performance of Gold for nearly two decades, making it challenging to envision a scenario where they could outpace the precious metal.
There are three primary reasons for this underperformance, but with Gold’s recent major breakout, two of these factors are poised to diminish.
One key factor contributing to the underperformance is the introduction of Gold ETFs (such as GLD) in the mid-2000s. Prior to the emergence of Gold ETFs, the majority of investors could only access Gold exposure through individual gold stocks. This factor remains relevant today.
A second factor is the prolonged secular bear market experienced by Gold and Silver since 2011. Gold prices have essentially remained stagnant for over a decade, while silver prices have remained well below their 2011 peaks.
Additionally, over the past four years, cost inflation has significantly impacted margins within the gold mining sector.
However, the landscape for gold stocks appears more promising now that Gold has broken out of its 13-year cup and handle pattern, potentially signaling the start of a new secular bull market.
Consider gold stocks and junior gold miners as akin to options on Gold. Historically, they have tended to outperform Gold following major breakouts in the precious metal and after substantial rebounds from extreme oversold conditions, as observed in 2008, 2016, and 2020.
As Gold’s upward potential begins to taper or reverse, gold stocks and junior gold miners may experience periods of underperformance relative to Gold.
With Gold recently experiencing what could be its most significant breakout in 50 years, if this breakout holds, it is reasonable to anticipate that gold stocks, particularly junior gold stocks, could see substantial outperformance over the coming year or two.
