While gold is valued for its buoyancy and great returns during economic recessions, owning gold mining stocks is even more highly valued, especially in gold bull markets as they yield much greater returns.
In the past two decades, the mining stocks of gold have surpassed gold bullion prices during bull markets. Gold miners provide more potential benefits and also possess greater drawbacks and higher volatility, especially in recessions. This makes strong hands and market timing even more necessary.
This can be seen in the price of physical gold, which grew 550% during the gold bull market period 2000–2011. In the same period, gold mining stocks made returns of over 690%.
During the current gold bull market, which began in 2015, gold mining equities have grown by over 182%, which has more than doubled gold bullion’s 78% returns. The bull market’s outperformance can mainly be attributed to how gold mining companies utilize their operative leverage to bump up their profits, which causes the prices of their shares to increase in value.
As a company that mines gold continues mining and producing gold, the precious metal is sold in the market quickly. This helps steer clear of the risk of the price of gold depreciating.
If the price of gold increases, miners realize more profits when they sell ounces of gold on the market. In bull markets, the cost of mining gold also increases but at a steady rate. This results in profit expansion; where gold mining companies that are operationally efficient rake in larger profits, which leads to increased free and operating cash flow.
A good example of this would be Barrick Gold Corporation (NYSE: GOLD) (TSX: ABX). While the company’s all-in sustaining costs per troy ounce only increased by 18%, the price realized (average) per troy ounce of gold has grown by 50% in the current gold bull run. In the last six years, the company has grown its profit per every ounce of gold that has been sold by 134%.
In addition to this, 2020 was a stressful year for many countries and industries, having affected some of the major industries such as the transport and oil industries worldwide. However, gold has shown its resilience, surpassing every asset class last year.
Gold miners provide many more returns to individuals who are willing to bear the additional risk the sector presents. Despite gold mining equities being much more volatile in comparison with gold bullion, their returns are much higher as compared to gold bull markets, which make them a tempting investment option.
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