Although over the long run we believe the precious metals will rise much higher in price, we are cautious over the shorter timeframe. This article will serve to illustrate one of the primary reasons for this caution. It is periodically important for physical precious metals investors to pay attention to another aspect of the gold market. The gold mining sector. We are not necessarily recommending that individuals invest in a gold miner. As the industry is filled with challenges including finding ore deposits, proving the grade of the deposit, and securing permitting for building the mine. The price of gold for coins and bars faces none of these challenges.

However, even if an individual has no desire to invest in the companies which dig gold out of the ground, there are still reasons to pay attention to what is happening on this other side of the market. One of the most important reasons why is to observe what the sector is pricing in as per gold valuation.

Gold Miners vs. Gold Price

There should be some observable relationship between the price of gold itself and the valuations of the companies that extract gold from the ground. After all, the miners’ profits (or lack thereof) are largely dependent on the price of gold. These profits are generally factored into equity valuations that investors assign to the company shares.

In essence, what we are saying is that when gold is moving higher, so should the share prices of gold mining companies, and vice versa. Thus, anytime there is a significant discrepancy in this relationship, it merits attention.

Below we show the HUI gold miners index, which is an average valuation of the 23 largest gold producers in the world which do not hedge their production. The index is shown on top, with the price of gold plotted immediately below it, since late-2015:

Miners Lagging

Note how the gold mining complex, which closed at 168 for the week on the index, would still need to raise some 65% to reach its 2016 peak near 280.

Meanwhile, the price of gold, which closed at $1,318, would only need to rise by 5% to reach its related 2016 peak of $1,378.

What is causing this discrepancy between the valuation of the gold miners and the price of gold itself?

While certainly, any individual gold miner could be having problems with ore purity, gold output, or mine financing, what we see above is an average of the sum of the gold mining industry. Not one single company.

It appears – in total – that gold mining investors do not believe that the price of gold is going to stay where it is in the future. If we study the relationship between the two sides of the industry dating back to late-2015, the gold miners are pricing in something closer to low $1,200 gold rather than low $1,300.

Could the sum of gold mining investors simply be wrong in their valuation models on gold prices?

Certainly. And there are examples of the miners being wrong throughout history.

However, such is rare. It is even more rare to observe the discrepancy happen over multi-year periods such as from 2016 through the present.

What to Make of this Divergence?

We simply want to caution gold investors that the mining sector is not pricing in $1,300 gold. But rather something closer to $1,200.

Should the miners be correct in their evaluations, there will be a better buying opportunity coming during the months ahead.

Stay tuned to these pages as we explore this process as the relationship unfolds.


Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. 

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third-party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.

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