Gold Miner Myths

“Gold Miners are a leveraged play on Gold”

“Gold Miners are a good hedge against the S&P 500”

There are few sectors in the market that generate as much attention, emotion, and misinformation as the Gold Miners. You’ll often hear some version of the two quotes above, stated as fact.

Let’s evaluate the data to determine their accuracy…

1) Leveraged Play on Gold?

The Gold Miner ETF (GDX) launched in May 2006. Since its inception the Gold ETF (GLD) has advanced over 84%. If you assumed that Gold Mining stocks would be up some multiple of this amount, you would be mistaken. Gold Miners have actually declined over 36% during the same period.

Total return since inception of GDX in May 2006 graph1

How is that possible?

For starters, there is no formula that states that the Miners have to return x% of Gold. They are not commodities but stocks, and as such their returns are dictated by dividends, earnings growth and multiple expansion/contraction. While these factors are undoubtedly influenced by the price of Gold, they are not ruled by the price of Gold. As we have seen since 2006, the price of Gold can go up and if the Mining companies are poorly managed and multiples contract, their stocks can certainly go down.

That’s not to say the two securities aren’t related. They are. With a monthly correlation of 0.83 between GLD and GDX, they often move in the same direction. And that’s not to say that the Miners don’t often behave as leveraged Gold. With an Upside Capture versus Gold of 172% (when gold is up, Miners are up an average of 1.72 times that amount) and a Downside Capture of 164% (when gold is down, Miners are down an average of 1.64 times that amount), they often do.

But often is not the same as always, and correlation is not the same thing as performance.

After trading largely in line with Gold from mid-2006 through mid-2008, the gap between Gold and the Miners widened significantly in the back half of 2008 when the Miners went into free fall. For the full 2008 year, Gold finished up 5% versus a 26% decline for the Miners.

Gold Miners ETF graph2

This was not the last time the Miners would move in the opposite direction to Gold. We saw the same occur in 2011 and 2012 when Gold advanced and the Miners finished lower.

Gold and Miners chart3

2) Good Hedge against the S&P 500?

Gold tends to be up (on average) when the S&P 500 is down, as evidenced by its Downside Capture of -27% (translation: Gold is up on average 0.27 times the S&P 500’s decline). By extension, many assume that the Gold Miners display a similar if not enhanced profile.

The problem is that Gold Mining stocks are still stocks, and while they may have a low correlation to the S&P 500 (0.17), the correlation is still positive. Since its inception in 2006, GDX has a Downside Capture of 60% versus the S&P 500 and has been down 53% of the time when the S&P 500 is down. It has basically been worse than a coin flip to bet that Gold Miners will be up in a down market for stocks broadly.

That’s not to say that the Miners can’t be a hedge at times. They certainly can be, as they are up 47% of the time when the S&P 500 is down. But one can hardly say that they are a “good hedge” when they are down 38% in October 2008, one of the worst months in history for the S&P 500 (-16.5%).

SPY and GDX chart4

In investing, there is nothing more important than knowing what you own and why you own it. Given their extreme volatility (40% annualized since the inception of GDX), this is probably more true for Gold Miners than any other sector. If you own the miners as a leveraged play on Gold or as a hedge to the S&P 500, you may want to reevaluate that rationale. If you don’t, you’re likely to be disappointed by their actual behavior.

That’s not to say that you should never own Gold Miners, but your reasons for owning them should ideally be based on something more than a myth.


Related Posts:

What is Gold?

Gold, What is it Good For

Lumber, Gold, and Volatility in Equities

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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