Why Gold Mining Stocks Outperform Gold in Bull Markets
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Why Gold Mining Stocks Outperform Gold in Bull Markets

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Why Gold Mining Stocks Outperform Gold in Bull Markets

Why Gold Mining Stocks Outperform Gold in Bull Markets

Gold is highly revered for its great returns and resilience during economic downturns, but during gold bull markets there’s something that regularly provides even greater returns: the ownership of gold mining stocks.

Over the past 20 years, gold mining stocks have outperformed the price of gold bullion in bull markets, offering what can be seen as a leveraged play on gold’s price appreciation.

While gold miners offer more potential upside, they also have higher volatility and greater downside during dips, making market timing and strong hands all the more important.

This infographic comes to us from Sprott and compares the returns of gold stocks and gold bullion in bull markets. It also explains how gold stocks outperform thanks to profit expansion, and shows why there might be more upside for gold miners to come.

How Operating Leverage Benefits Gold Mining Companies

During the 2000-2011 gold bull market, the price of physical gold rose 550%. While you might think that number is hard to beat, over the same period of time gold mining equities (represented by the NYSE Arca Gold Miners Index) returned more than 690%.

In the current gold bull market which started in 2015, gold mining stocks are up more than 182%, more than doubling gold bullion’s 78% returns.

This outperformance in bull markets is largely due to how gold mining companies use their operating leverage to maximize profits, resulting in their share prices appreciating.

Breaking Down Gold Mining Costs and Profits

As a gold mining company mines and produces gold, the gold is sold on the market fairly quickly to avoid the risk of gold’s price depreciating.

When the price of gold rises, miners immediately start to see greater profits from selling their ounces on the market. While the costs to mine gold also rise in bull markets, they rise less and at a slower rate.

The result of this is profit expansion: when operationally efficient gold mining companies are able to capture larger profits, resulting in increased operating and free cash flow.

Breakdown of Barrick Gold’s Profit per Ounce of Gold

YearAll-in Sustaining Costs/oz (in USD)Realized Gold Price/oz (in USD)Profit/oz (in USD)
2015$831$1,157$326
2016$730$1,248$518
2017$750$1,258$508
2018$806$1,267$461
2019$894$1,396$502
2020$984$1,748$764

During the current gold bull run which started in 2015, Barrick Gold’s average realized price per troy ounce of gold increased by 50%, while their all-in sustaining costs per troy ounce only went up by 18%.

This has resulted in the company increasing their profit per ounce of gold sold by a staggering 134% over the past six years.

Making the Most of Golden Times

While higher profit margins during bull markets are great, it’s up to the individual company to ensure the extra cash is being used prudently to efficiently support their operations.

Bull markets don’t last forever, and gold miners must use these prosperous times to strengthen their balance sheets, reward shareholders, and reinvest into projects which will provide future value and returns.

Dividend-paying gold stocks increase dividends to reward loyal shareholders, with the average dividend increase of top gold mining stocks in a bull market often doubling.

Over the decades, companies have gotten better at making the most of bull markets in order to be well-guarded for when gold prices stop appreciating, and eventually start declining.

Why Gold Mining Stocks May Still Be Undervalued

Even if gold mining stocks have already seen impressive returns over the past five years, there are some technical indicators which point to them still being undervalued compared to other equities and gold bullion.

  • The top 10 gold mining companies have seen their earnings per share estimates almost triple in the past two years.
  • The top 20 S&P 500 companies have seen around a -15% decline in their earnings per share estimates.

Along with having better earnings per share compared to the top U.S. equities, gold mining stocks may also be undervalued compared to gold bullion.

The gold mining stocks to gold bullion ratio is at historically low levels after having dropped more than 60% following the 2008 financial crisis. While gold bullion is increasingly seen as a safe haven asset for investors, gold miners are still overlooked despite their strong technicals.

Gold and Gold Miners’ Role in the Future Economy

As money printing has been the Federal Reserve’s main answer to an increasingly volatile economic climate, gold and its producers are set to play a crucial role in helping investors preserve their wealth.

Gold has yet again outperformed just about every other asset class in 2020, and gold miners offer even greater returns for those willing to manage the additional risk they present.

Gold mining stocks are much more volatile compared to gold bullion, and have a variety of additional risks dependent on their company structure, jurisdiction of operations, and operational efficiency. But for investors who are looking for exceptional returns in gold bull markets, they can be an alluring option.

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Energy

The Periodic Table of Commodity Returns (2012-2021)

Energy fuels led the way as commodity prices surged in 2021, with only precious metals providing negative returns.

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commodity returns 2021 preview

The Periodic Table of Commodity Returns (2022 Edition)

For investors, 2021 was a year in which nearly every asset class finished in the green, with commodities providing some of the best returns.

The S&P Goldman Sachs Commodity Index (GSCI) was the third best-performing asset class in 2021, returning 37.1% and beating out real estate and all major equity indices.

This graphic from U.S. Global Investors tracks individual commodity returns over the past decade, ranking them based on their individual performance each year.

Commodity Prices Surge in 2021

After a strong performance from commodities (metals especially) in the year prior, 2021 was all about energy commodities.

The top three performers for 2021 were energy fuels, with coal providing the single best annual return of any commodity over the past 10 years at 160.6%. According to U.S. Global Investors, coal was also the least volatile commodity of 2021, meaning investors had a smooth ride as the fossil fuel surged in price.

Commodity2021 Returns
Coal160.61%
Crude Oil55.01%
Gas46.91%
Aluminum42.18%
Zinc31.53%
Nickel26.14%
Copper25.70%
Corn22.57%
Wheat20.34%
Lead18.32%
Gold-3.64%
Platinum-9.64%
Silver-11.72%
Palladium-22.21%

Source: U.S. Global Investors

The only commodities in the red this year were precious metals, which failed to stay positive despite rising inflation across goods and asset prices. Gold and silver had returns of -3.6% and -11.7% respectively, with platinum returning -9.6% and palladium, the worst performing commodity of 2021, at -22.2%.

Aside from the precious metals, every other commodity managed double-digit positive returns, with four commodities (crude oil, coal, aluminum, and wheat) having their best single-year performances of the past decade.

Energy Commodities Outperform as the World Reopens

The partial resumption of travel and the reopening of businesses in 2021 were both powerful catalysts that fueled the price rise of energy commodities.

After crude oil’s dip into negative prices in April 2020, black gold had a strong comeback in 2021 as it returned 55.01% while being the most volatile commodity of the year.

Natural gas prices also rose significantly (46.91%), with the UK and Europe’s natural gas prices rising even more as supply constraints came up against the winter demand surge.

Energy commodity returns 2021

Despite being the second worst performer of 2020 with the clean energy transition on the horizon, coal was 2021’s best commodity.

High electricity demand saw coal return in style, especially in China which accounts for one-third of global coal consumption.

Base Metals Beat out Precious Metals

2021 was a tale of two metals, as precious metals and base metals had opposing returns.

Copper, nickel, zinc, aluminum, and lead, all essential for the clean energy transition, kept up last year’s positive returns as the EV batteries and renewable energy technologies caught investors’ attention.

Demand for these energy metals looks set to continue in 2022, with Tesla having already signed a $1.5 billion deal for 75,000 tonnes of nickel with Talon Metals.

Metals price performance 2021

On the other end of the spectrum, precious metals simply sunk like a rock last year.

Investors turned to equities, real estate, and even cryptocurrencies to preserve and grow their investments, rather than the traditionally favorable gold (-3.64%) and silver (-11.72%). Platinum and palladium also lagged behind other commodities, only returning -9.64% and -22.21% respectively.

Grains Bring Steady Gains

In a year of over and underperformers, grains kept up their steady track record and notched their fifth year in a row of positive returns.

Both corn and wheat provided double-digit returns, with corn reaching eight-year highs and wheat reaching prices not seen in over nine years. Overall, these two grains followed 2021’s trend of increasing food prices, as the UN Food and Agriculture Organization’s food price index reached a 10-year high, rising by 17.8% over the course of the year.

Grains price performance 2021

As inflation across commodities, assets, and consumer goods surged in 2021, investors will now be keeping a sharp eye for a pullback in 2022. We’ll have to wait and see whether or not the Fed’s plans to increase rates and taper asset purchases will manage to provide price stability in commodities.

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Mining

Visualizing the Scale and Composition of the Earth’s Crust

This animation shows the handful of minerals and elements that constitute the Earth’s crust.

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Visualizing the Scale and Composition of the Earth's Crust share

Visualizing the Scale and Composition of the Earth’s Crust

For as long as humans have been wandering the top of Earth’s crust, we’ve been fascinated with what’s inside.

And Earth’s composition has been vital for our advancement. From finding the right kinds of rocks to make tools, all the way to making efficient batteries and circuit boards, we rely on minerals in Earth’s crust to fuel innovation and technology.

This animation by Dr. James O’Donoghue, a planetary researcher at the Japan Aerospace Exploration Agency (JAXA) and NASA, is a visual comparison of Earth’s outer layers and their major constituents by mass.

What is the Composition of Earth’s Crust?

The combined mass of Earth’s surface water and crust, the stiff outermost layer of our planet, is less than half a percent of the total mass of the Earth.

There are over 90 elements found in Earth’s crust. But only a small handful make up the majority of rocks, minerals, soil, and water we interact with daily.

1. Silicon

Most abundant in the crust is silicon dioxide (SiO2), found in pure form as the mineral quartz. We use quartz in the manufacturing of glass, electronics, and abrasives.

Why is silicon dioxide so abundant? It can easily combine with other elements to form “silicates,” a group of minerals that make up over 90% of Earth’s crust.

Clay is one of the better-known silicates and micas are silicate minerals used in paints and cosmetics to make them sparkle and shimmer.

MineralMajor ElementsPercentage of Crust
Plagioclase FeldsparO, Si, Al, Ca, Na39%
Alkali FeldsparO, Si, Al, Na, K12%
QuartzO, Si12%
PyroxeneO, Si, Mg, Fe11%
AmphiboleO, Si, Mg, Fe5%
Non-silicatesVariable8%
MicasO, Si, Al, Mg, Fe, Ca, Na, K5%
Clay MineralsO, Si, Al, Mg, Fe, Ca, Na, K5%
Other SilicatesO, Si3%

2. Aluminum and Calcium

SiO2 bonds very easily with aluminum and calcium, our next most abundant constituents. Together with some sodium and potassium, they form feldspar, a mineral that makes up 41% of rocks on Earth’s surface.

While you may not have heard of feldspar, you use it every day; it’s an important ingredient in ceramics and it lowers the melting point of glass, making it cheaper and easier to produce screens, windows, and drinking glasses.

3. Iron and Magnesium

Iron and magnesium each make up just under 5% of the crust’s mass, but they combine with SiO2 and other elements to form pyroxenes and amphiboles. These two important mineral groups constitute around 16% of crustal rocks.

Maybe the best known of these minerals are the two varieties of jade, jadeite (pyroxene) and nephrite (amphibole). Jade minerals have been prized for their beauty for centuries, and are commonly used in counter-tops, construction, and landscaping.

Some asbestos minerals, now largely banned for their cancer-causing properties, belong to the amphibole mineral group. They were once in high demand for their insulating and fire-retardant properties and were even used in brake pads, cigarette filters, and as artificial snow.

4. Water

Surprisingly, even though it covers almost three quarters of Earth’s surface, water (H2O) makes up less than 5% of the crust’s mass. This is partly because water is significantly less dense than other crustal constituents, meaning it has less mass per volume.

Breaking Earth’s Crust Down by Element

Though there are many different components that form the Earth’s crust, all of the above notably include oxygen.

When breaking down the crust by element, oxygen is indeed the most abundant element at just under half the mass of Earth’s crust. It is followed by silicon, aluminum, iron, calcium, and sodium.

All other remaining elements make up just over 5% of the crust’s mass. But that small section includes all the metals and rare earth elements that we use in construction and technology, which is why discovering and economically extracting them is so crucial.

What Lies Below?

As the crust is only the outermost layer of Earth, there are other layers left to contemplate and discover. While we have never directly interacted with the Earth’s mantle or core, we do know quite a bit about their structure and composition thanks to seismic tomography.

The Upper Mantle

At a few specific spots on Earth, volcanic eruptions and earthquakes have been strong enough to expose pieces of the upper mantle, which are also made of mostly silicates.

The mineral olivine makes up about 55% of the upper mantle composition and causes its greenish color. Pyroxene comes in second at 35%, and calcium-rich feldspar and other calcium and aluminum silicates make up between 5–10%.

Going Even Deeper

Beyond the upper mantle, Earth’s composition is not as well known.

Deep-mantle minerals have only been found on Earth’s surface as components of extra-terrestrial meteorites and as part of diamonds brought up from the deep mantle.

One thing the lower mantle is thought to contain is the silicate mineral bridgmanite, at an abundance of up to 75%. Earth’s core, meanwhile, is believed to be made up of iron and nickel with small amounts of oxygen, silicon, and sulphur.

As technology improves, we will be able to discover more about the mineral and elemental makeup of the Earth and have an even better understanding of the place we all call home.

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