Physical Gold vs Gold Miners: The Miner Ratio Has Been Falling for 20 Years
One of the most common ways analysts attempt to value gold mining stocks is surprisingly simple: divide the price of the GDX gold-miners ETF by the price of gold.
The theory is that when this ratio is unusually low, miners are “cheap” compared with gold. When it’s high, miners may be expensive.
There is just one problem.
The ratio doesn’t consistently revert to its old levels.
The GDX-to-gold ratio reached approximately 0.056 in September 2006. Today, according to the analysis shown below, it sits around 0.022, less than half its former peak.
Look carefully at the following chart that shows GDX divided by the daily gold price since the fund’s launch in 2006 (with its rolling three-year average).
This isn’t simply a market that became cheap and stayed cheap. The relative value of the mining basket has effectively stair-stepped lower over multiple cycles.
Why? Because owning a mining company introduces risks that owning an ounce of physical gold does not.
A miner has employees. Equipment. Energy costs. Debt. Management. Shareholders. Environmental obligations. Political and jurisdictional risks. Exploration expenses. Capital expenditures. And potentially additional shares being issued that dilute existing owners.
Gold doesn’t have a management team. Gold doesn’t report quarterly earnings. It doesn’t have labor costs. It doesn’t need diesel fuel to operate. It can’t issue more shares. And it doesn’t have a board of directors that control its future.
That helps explain an important finding in the historical data: measured against their own recent history, the median 12-month outcome for the broad GDX mining basket has trailed gold regardless of the miner ratio’s starting level or direction.
That doesn’t make mining companies bad investments. It means a mining stock and physical gold serve fundamentally different purposes.
When Gold Explodes Higher, Miners Can Multiply the Move
This is where the miner story gets interesting.
If miners routinely underperform gold, then why own them at all?
Because when gold makes an unusually large move, mining stocks can behave like a leveraged play on that move.
The chart below illustrates the relationship beautifully.
Each bar is the median amount by which GDX beat or trailed gold over 12-month windows, grouped by gold’s own move in the same window.
When gold declined more than 10% over the tested 12-month windows, GDX underperformed gold by a median 22.1 percentage points and beat gold 0% of the time.
When gold was roughly flat, miners still underperformed by a median 9.6 points and beat gold only 20% of the time.
But watch what happens as gold begins moving substantially higher.
When gold gained 10% to 25%, miners beat it by a median 3.0 percentage points.
Between 25% and 50%, the advantage increased to 4.6 points.
And then comes the extraordinary category: when gold rose 50% or more, GDX beat gold by a median 68.5 percentage points. Miners outperformed gold in 90% of those periods. The underlying analysis found a median GDX return of approximately 130% in those windows.
That’s extraordinary upside. But it also tells us something important about what miners actually are.
Miners aren’t a better version of gold. They’re a leveraged bet on favorable conditions for gold. And leverage works both ways. The same operational structure that can allow a miner’s profits to explode when gold rises rapidly can punish shareholders when gold falls, costs increase or margins get squeezed.
There’s another important catch.
The analysis found that this historical relationship didn’t work as a simple forward-looking trading signal. Once gold had already run strongly for six months, buying miners afterward showed no consistent forward advantage. The excess return tended to be earned during gold’s explosive move, not simply by chasing mining stocks after the move was obvious.
That’s a very different proposition from simply buying physical gold as a long-term portfolio holding.
Silver Miners Tell a Similar Story
Silver miners show many of the same characteristics, although the relationship is even more volatile.
The chart below compares the SIL silver-miner ETF with silver itself and measures how far the ratio has moved from its rolling three-year average.
The SIL/silver ratio is expressed as standard deviations above or below its rolling three-year average. Shaded zones mark stretched readings.
The historical extremes are revealing.
In January 2016, the SIL-to-silver ratio fell to approximately 2.9 standard deviations below its three-year norm.
What followed was spectacular: SIL rose 247% over the following seven months. Which is exactly the kind of move that attracts investors to mining shares.
But now look at the opposite end of the chart.
The SIL-to-silver ratio currently sits roughly 2.4 standard deviations above its recent norm, putting it in what the analysis characterizes as historically “stretched rich” territory.
Historically, similar stretches have tended to precede periods in which silver itself outperformed the miners, although the number of observations at these extremes is limited.
That doesn’t necessarily mean silver miners are about to collapse. It means the relative-value picture is very different today than it was when miners were deeply depressed. And that’s precisely why investors shouldn’t confuse mining shares with physical silver.
A silver miner is an operating company whose profitability is influenced by the silver price. Physical silver is the underlying asset itself.
One is an equity investment. The other is a tangible commodity.
They may participate in the same precious-metals market, but their risk profiles can be dramatically different.
Physical Metals vs. Miners: Know What You Are Trying to Accomplish
This brings us to the most important takeaway.
The question isn’t necessarily whether physical metals or mining stocks are “better.” It’s what job you expect them to perform.
For a speculative investor attempting to capitalize on an aggressive precious metals bull market, carefully selected mining companies can offer extraordinary upside. History proves that. But extraordinary upside comes with extraordinary volatility and additional layers of risk.
Mining investors must consider company management, balance sheets, production costs, reserves, jurisdictional exposure, labor, energy prices, financing, dilution and countless other variables.
Investing in physical gold and silver doesn’t depend on a mining company to execute their business plan, because you own the finished asset. And that’s an important distinction for investors whose primary objective is wealth perseveration.
Physical gold and silver can be held directly. They don’t represent a promise from a corporation. They aren’t dependent upon a CEO producing quarterly results. They don’t require a mine to remain profitable. And unlike a mining ETF, physical precious metals aren’t a basket containing both excellent operators and poorly managed companies.
That’s why we generally view miners as belonging on the more speculative end of the precious metals spectrum, while physical gold and silver may be more appropriate for people whose primary goal is long-term diversification and wealth preservation.
The historical data reinforces that distinction.
The broad mining basket has tended to lag against metals during ordinary periods. For example, when gold struggles, miners can struggle considerably more. But when precious metals enter extraordinary bull market periods, miners can suddenly deliver explosive relative returns.
In other words: physical metals are the asset. Companies that mine the metals are built around the asset.
Those are not the same investment.
And for a long-term, non-speculative investor, that difference can be more important than trying to predict which mining stock might deliver the next 100% return.
The Bottom Line
Mining stocks can absolutely have a place in a precious metals strategy. But the historical record suggests they should not automatically be treated as substitutes for physical gold and silver.
Their greatest relative returns have tended to arrive in concentrated bursts, while the broader mining basket has routinely faced a long-term headwind relative to the metals themselves.
For investors who want to speculate on rising metals prices, miners can provide leverage.
For investors who want to own the actual asset and focus primarily on long-term wealth preservation, physical precious metals offer a fundamentally different approach.
At National Gold Group, that’s the distinction we believe people should understand before deciding where precious metals belong in their portfolio.
If you want to learn more about owning physical gold and silver as part of your retirement savings, request your free “Ultimate Gold Guide” and speak with a precious metals specialist about your options.
