Monday, May 23, 2016

Does Investing In Mining Stocks Make Any Sense?

Investing in mining companies is a hard job. Most of the time it is a much better idea to hold gold than mining stocks. To be honest, excluding a few short periods, investing in mining companies had no sense in modern times. The chart below shows the relative strength of mining companies (represented by the XAU index) against the gold itself:


Indeed, only between 2000 and 2008 precious metals miners were as strong as gold. In that period the gold investors had the same investment results as the investors holding XAU (a broad portfolio of mining companies).  Then, starting from 2008, investing in a broad precious metals miners market had no sense at all (note the green, descending line). 

However, since the beginning of 2016 the situation has changed. Now mining stocks are much stronger than gold. The problem is whether this outperformance of miners is sustainable. 

Well, if history repeats, we should see a large increase in the price of gold with mining shares losing their strength against gold. If that is not the case, and mining shares continue their outperformance, we could see a gold mania. Please, keep in mind that since the start of the great bull market in gold in 2001 there was no mania at all.  

Last but not least - investing in specific miners is another thing. In my opinion, good analyst should be able to find mining stocks which are stronger than gold at various stages of the gold cycle...

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