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A Golden Bet:

Gold Mining Equities versus Gold

Claude Erb

TR

February 17, 2014

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Summary

If there is a long-run equilibrium between gold and gold mining equities

Then the price of gold suggests gold mining equities could rise 100%, and

The price of gold mining equities suggests gold could fall 50%

A seeming equilibrium relationship may be fundamental or behavioral

A fundamental relationship may exist over many different time periods

A behavioral relationship may hold over one period or many time periods

A seeming long-run equilibrium may be more apparent than real

2

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Historical Gold and Gold Miner Equity Indices

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$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

Price

NYSE ARCA Gold Miners Index Gold

3

Monthly Price Correlation 0.84

Monthly Return Correlation 0.77

Note: Bloomberg data. If the prices of two assets are highly correlated it is common to test for cointegration. If two asse t prices have an underlying

long-term equilibrium relationship then they are often said to be cointegrated. Testing for cointegration is challenging. A pair of assets that perhapsappeared to be cointegrated in the past may not exhibit cointegration in the future. The reason for the change could be fundamental or behavioral.

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A Behavioral View

What if One Wants to Believe That Gold Drives Gold Miners

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$1,800

$2,000

Price

NYSE ARCA Gold Miners Index "Gold Predicted" NYSE ARCA Gold Miners Index

4

Note: Bloomberg data. The red line shows the in-sample regression based fitted value of the NYSE ARCA Gold Miners Index conditional

on the price of gold. Observing what seems to be a predictable relationship between two asset prices does not establish whether the seemingrelationship is a reflection of some concrete connection between the two assets or whether it is just a reflection of the way that certain market

participants active in those assets behaved at a certain time.

Actual

Expected

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A Behavioral View

Alternatively, What if One Wants to Believe That Gold Miners Drive Gold

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Price

Gold Price NYSE ARCA Gold Miners Index Predicted" Gold Price

5Note: Bloomberg data. The red line shows the in-sample regression based fitted value of the price of gold conditional on theNYSE ARCA Gold Miners Index

Actual

Expected

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Whats Cheap? Whats Expensive?

-$800

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-$200

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$800

$1,000

Price

"Gold Mining Equities" Mispricing Gold Mispricing

6

Note: Bloomberg data. Mispricing is simply a fitted regression residual. For instance, the gold mining equity mispricing is the difference between

the actual price of the NYSE ARCA Gold Miners Index and the expected price of the index where the expected price is :Expected Gold Miner Price = intercept + b * the price of gold. The seeming wide mispricing may be a sign of opportunity or of a regime shift

Expensive

Cheap

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A Few Building Blocks

In order to compare gold miners to gold it makes sense to think about

The actual and expected return of gold

The actual and expected return of gold miners

The valuation of gold

The valuation of gold miners

7

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Expected Return

Should gold miners match, exceed or underperform the return of gold?

The price of gold reflects the supply and demand of already mined gold

The value of a gold miner reflects the present value of yet to be mined gold

Simplistically, what is the present value of a gold miner if

It has no reserves or its reserves consistently decline

Its cost of production is greater than the price of gold

It goes bankrupt, for whatever reason

Gold has been around for thousands of years, on-going miners have not 8

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Gold Mining Equities:

Horrible Performance Compared To Gold and Stocks

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

Growthof$1

(TotalReturn)

NYSE ARCA Gold Miners Index COMEX Gold S&P 500

9

Note: Bloomberg data. The backfilled inception date for the NYSE ARCA Gold Miners Index (GDM) is September 1993. The Market Vectors Gold Miners ETF (GDX)

was launched in May of 2006. The since September 2006 returns for GDM and GDX are similar. How real the pre-2006 returns are is problematic. There areother gold miner indices: the NYSE ARCA Gold Bugs index (HUI) and the Philadelphia Gold and Silver index (XAU). Options have been traded on the XAU since

the 1980s. HUI is seemingly just an index. GDM may not be the best index but it is investable.

GDM Gold S&P 500

Annualized Geometric Return 1.21% 6.31% 8.98%

Annualized Standard Deviation 37.45% 16.32% 15.12%

Time period: 9/1993 to 1/2014

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Gold Mining Equities:

Poor Index and Index Constituent Performance

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$3.50

Growthof$1

(TotalReturn)

NYSE ARCA Gold Miners Index Newmont Barrick

10

Note: Bloomberg data. The backfilled inception date for the NYSE ARCA Gold Miners Index (GDM) is September 1993. Two of the largest constituents of the

Market Vectors Gold Miners ETF (GDX) are Newmont Mining (NEM) and Barrick Gold (ABX). The since September 1993 total returns for NEM and ABX are

similar to those of the NYSE ARCA Gold Miners Index (GDM).

GDM Newmont Barrick

Annualized Geometric Return 1.21% -1.66% 0.25%

Annualized Standard Deviation 37.45% 40.23% 37.36%

Time period: 9/1993 to 1/2014

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Gold Miner Gold Beta Declines With The Investment Time Horizon

1.76

1.49

1.09

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0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

One Month One Year Five Years

GoldMinerGoldBe

ta

(

September1993toJanua

ry2014)

12

Note: Bloomberg data. Both the one year and the five year gold beta regression coefficients use overlapping return data. Th e data do not provide

any information on the true underlying gold betas at any time horizon. The data provide a sense of what the estimated betas were during a giventime period. Future time periods could, of course, be different from the past. The possibility of gold betas declining with the investment horizon has

multiple inconclusive explanations. Regressions of NYSE ARCA Gold Miners Index excess returns on COMEX gold excess returns.

Gold may be the major driver of gold miner returns

Gold miner gold beta seems to decline as the investment horizon increases

Apparently gold miners may not be a levered gold play, at long horizons

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The Golden Constant

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0 50 100 150 200 250

COMEXGoldP

rice

(January1975toDece

mber2013)

U.S. CPI Index

(January 1975 to December 2013)

13

The golden constant is an assertion that the price of gold keeps up with inflation

In the long-run

It can also be restated that the expected real price of gold is constant

And the expected return of gold is simply the expected rate of inflation

Note: Bloomberg data. Monthly observations.

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The Golden Constant

The Real Price of Gold is Like the Shiller CAPE Ratio for Gold

0

1

2

3

4

5

6

7

8

9

10

RealPriceofGold

(GoldPrice/USCPIInd

ex)

Gold Price/US CPI Index Average

14

Note: Bloomberg data. Jastram wrote about the golden constant, the idea that the real purchasing power of gold has been constant over some

undefined long time period. Erb and Harvey (2012a) presented a short-term version of the real price of gold, the ratio of the nominal gold price divided by

the US CPI index. Erb and Harvey (2012b) found that this measure of the real price of gold was essentially the same everywhere. Erb and Harvey suggested

that the real price of gold could be viewed as the price-earnings ratio of gold (where the level of an inflation index was substituted for earnings).

Expensive

Cheap

Golden Dilemma

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2148691http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2148691http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535

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The Real Price of Gold and Subsequent Ten Year Real Gold Returns

(January 1975 to January 2014)

-15%

-10%

-5%

0%

5%

10%

15%

20%

0 1 2 3 4 5 6 7 8 9 10

Annu

alizedNextTenYearRea

lGoldPriceReturn

Real Price of Gold

(Gold Price/US CPI Index)

15

Note: Bloomberg data. The x-axis shows the real price of gold, defined as the price of gold divided by the level of the US CPI index. The y-axis shows the

subsequent annualized ten year real return for the price of gold. For instance, take the real price of gold in January 1975 and match it with the real gold returnfor the following ten years, from January 1975 to January 1985

A low real gold price has been followed

by high real gold returns

A high real gold price has been followed

by low real gold returns

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Ratio Analysis and Statistical Equilibrium

Ratios are common and may or may not count what counts

For instance, Shillers CAPE ratio or the real price of gold

Ratios are often used to frame expectations of a statistical equilibrium

For instance, the fair value of the stock market or gold

Belief in ratios and statistical equilibrium is an act of faith, not an act of fact

A challenge

Ed Leamer: We are pattern-seeking, story-telling animals

Howard Marks: its not what you buy; its what you pay for it

Julius Caesar: Men willingly believe what they want to believe

16

http://www.amazon.com/Macroeconomic-Patterns-Stories-Edward-Leamer/dp/3540463887http://www.amazon.com/The-Most-Important-Thing-Thoughtful/dp/0231153686http://en.wikiquote.org/wiki/Julius_Caesarhttp://en.wikiquote.org/wiki/Julius_Caesarhttp://www.amazon.com/The-Most-Important-Thing-Thoughtful/dp/0231153686http://www.amazon.com/Macroeconomic-Patterns-Stories-Edward-Leamer/dp/3540463887http://www.amazon.com/Macroeconomic-Patterns-Stories-Edward-Leamer/dp/3540463887http://www.amazon.com/Macroeconomic-Patterns-Stories-Edward-Leamer/dp/3540463887http://www.amazon.com/Macroeconomic-Patterns-Stories-Edward-Leamer/dp/3540463887http://www.amazon.com/Macroeconomic-Patterns-Stories-Edward-Leamer/dp/3540463887

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Numerous Gold Miner Price/Gold Price Ratio References

Many articles that seem to assume an equilibrium miner-gold relationship

Often expressed as a Gold Miner/Gold Price Ratio

Gold Stocks, the Gold Price and Market Timing

The Adjusted Gold/XAU Ratio as an Indicator of Forward Returns for Gold Stocks

Gold/XAU Ratio Signals Market Froth

Four simple indicators for monitoring the condition of the precious metals markets

Which Index is the Best to Use: the HUI, XAU or the GDX?

This Indicator Hasnt Been Wrong in 27 Years And Right Now its Screaming Buy!

17

https://www.cass.city.ac.uk/__data/assets/pdf_file/0005/69935/Gold-Stocks,-the-Gold-Price-and-Market-Timing.pdfhttp://www.advisorperspectives.com/newsletters11/pdfs/The_Adjusted_Gold-XAU_Ratio_as_an_Indicator_of_Forward_Returns_for_Gold_Stocks.pdfhttp://www.resourceinvestor.com/2006/01/11/goldxau-ratio-signals-market-frothhttp://www.hussmanfunds.com/html/gold.htmhttps://www.munknee.com/which-index-is-the-best-to-use-the-hui-xau-or-the-gdx/http://www.oilandenergydaily.com/2013/01/11/this-indicator-hasnt-been-wrong/http://www.oilandenergydaily.com/2013/01/11/this-indicator-hasnt-been-wrong/http://www.oilandenergydaily.com/2013/01/11/this-indicator-hasnt-been-wrong/http://www.oilandenergydaily.com/2013/01/11/this-indicator-hasnt-been-wrong/http://www.oilandenergydaily.com/2013/01/11/this-indicator-hasnt-been-wrong/http://www.oilandenergydaily.com/2013/01/11/this-indicator-hasnt-been-wrong/http://www.oilandenergydaily.com/2013/01/11/this-indicator-hasnt-been-wrong/http://www.oilandenergydaily.com/2013/01/11/this-indicator-hasnt-been-wrong/http://www.oilandenergydaily.com/2013/01/11/this-indicator-hasnt-been-wrong/http://www.oilandenergydaily.com/2013/01/11/this-indicator-hasnt-been-wrong/https://www.munknee.com/which-index-is-the-best-to-use-the-hui-xau-or-the-gdx/https://www.munknee.com/which-index-is-the-best-to-use-the-hui-xau-or-the-gdx/https://www.munknee.com/which-index-is-the-best-to-use-the-hui-xau-or-the-gdx/https://www.munknee.com/which-index-is-the-best-to-use-the-hui-xau-or-the-gdx/http://www.hussmanfunds.com/html/gold.htmhttp://www.hussmanfunds.com/html/gold.htmhttp://www.hussmanfunds.com/html/gold.htmhttp://www.hussmanfunds.com/html/gold.htmhttp://www.resourceinvestor.com/2006/01/11/goldxau-ratio-signals-market-frothhttp://www.resourceinvestor.com/2006/01/11/goldxau-ratio-signals-market-frothhttp://www.advisorperspectives.com/newsletters11/pdfs/The_Adjusted_Gold-XAU_Ratio_as_an_Indicator_of_Forward_Returns_for_Gold_Stocks.pdfhttp://www.advisorperspectives.com/newsletters11/pdfs/The_Adjusted_Gold-XAU_Ratio_as_an_Indicator_of_Forward_Returns_for_Gold_Stocks.pdfhttp://www.advisorperspectives.com/newsletters11/pdfs/The_Adjusted_Gold-XAU_Ratio_as_an_Indicator_of_Forward_Returns_for_Gold_Stocks.pdfhttp://www.advisorperspectives.com/newsletters11/pdfs/The_Adjusted_Gold-XAU_Ratio_as_an_Indicator_of_Forward_Returns_for_Gold_Stocks.pdfhttp://www.advisorperspectives.com/newsletters11/pdfs/The_Adjusted_Gold-XAU_Ratio_as_an_Indicator_of_Forward_Returns_for_Gold_Stocks.pdfhttp://www.advisorperspectives.com/newsletters11/pdfs/The_Adjusted_Gold-XAU_Ratio_as_an_Indicator_of_Forward_Returns_for_Gold_Stocks.pdfhttp://www.advisorperspectives.com/newsletters11/pdfs/The_Adjusted_Gold-XAU_Ratio_as_an_Indicator_of_Forward_Returns_for_Gold_Stocks.pdfhttps://www.cass.city.ac.uk/__data/assets/pdf_file/0005/69935/Gold-Stocks,-the-Gold-Price-and-Market-Timing.pdfhttps://www.cass.city.ac.uk/__data/assets/pdf_file/0005/69935/Gold-Stocks,-the-Gold-Price-and-Market-Timing.pdfhttps://www.cass.city.ac.uk/__data/assets/pdf_file/0005/69935/Gold-Stocks,-the-Gold-Price-and-Market-Timing.pdfhttps://www.cass.city.ac.uk/__data/assets/pdf_file/0005/69935/Gold-Stocks,-the-Gold-Price-and-Market-Timing.pdf

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Wasting Asset

NYSE ARCA Gold Miners Index/Gold Price Ratio

Price Ratio = -8E-05 x Time + 4.2838

R = 0.2302

0.00

0.50

1.00

1.50

2.00

2.50

PriceRatio

NYSE Gold Miners Index/Gold Price

18Note: Bloomberg data. Regress the price ratio (NYSE ARCA Gold Miners Index/Gold Price Ratio) on time. The trend line declines over time. There is noobvious ex-ante narrative for this downward sloping trend line. However, ex post, it is possible to imagine that gold mines are wasting assets.

Historically, the passage of time has been associated with a declining price ratio

This could reflect the possibility that gold mines are wasting assets

Whatever the true potential of a mine, its potential does not increase with time

Rather it declines with time

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Historically, An Inverse Relationship Between

Future Relative Returns and the Current Price Ratio

Next Five Year Relative Return = -0.2496 x GDM/Gold Price Ratio + 0.3211

R = 0.6546

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0.00 0.50 1.00 1.50 2.00 2.50

AnnualizedNextFiveYearR

elativeReturn

GDM/GoldRetu

rn

NYSE ARCA Gold Miners Index/Gold Price Ratio

19

Low Price Ratio

High Relative Return

High Price Ratio

Low Relative Return

Note: Bloomberg data. The X axis shows values of the NYSE ARCA Gold Miners Index/Gold Price Ratio from September 1993 to January 2009. The Y axis displays

the annualized rate of return for the price ratio over the next five years. So, for instance, the first data pair shows the price ratio for September 1993and the annualized five year price ratio return from September 1993 to September 1998.

Current

Ratio

0.52

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Gold Miner Index Price-To-Book Ratio And Miner/Gold Ratio

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 2.00

GDMP

rice-To-BookRatio

(M

onthlyObservations,10/04to1/14)

GDM Index/Gold Price Ratio

(Monthly Observations, 10/04 to 1/14)

NYSE Arca Gold Miners Index Current

20Note: Bloomberg data.

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If Gold Mining Equities Are So Attractive, Why The Aggressive Selling?

21

Note: Bloomberg data. There is, of course, a nuance to the idea that there was heavy selling of gold miners. By definition there must have also been

heavy buying of the shares being sold. So, the sellers possibly lost patience with their investment or were convinced that things had fundamentallychanged for the worse. The buyers, rightly or wrongly, apparently did not share the sentiment of the sellers.

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Conclusion

It is possible to entertain the idea that inflation drives the price of gold

It is possible there is an equilibrium gold and gold mining equities relationship

It is possible to believe in the idea but there is no way to prove the belief

However, given a willingness to assume such a relationship exists then

The price of gold may be expensive

The price of gold mining equities may be cheap

22

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References

23

Ap Gwilym, Owain, Andrew Clare, James Seaton and Stephen Thomas. 2010. "Gold Stocks, the Gold Price and Market Timing", Cass Business School working paper

Asness, Clifford S. 2014. My Top 10 Peeves, Financial Analysts Journal, vol. 70, no. 1(January/February): 22-30

Avellaneda, Marco and Jeong-Hyun Lee. 2009. Statistical Arbitrage in the U.S. Equities Market, working paper

Campbell, John Y., Robert J. Shiller. 1998. Valuation Ratios and the Long-Run Stock Market Outlook, Journal of Portfolio Management, vol. 24, no. 2 (Winter): 11-

26

DiBartolomeo , Dan. 1993. Behavior of Gold Mining Equities: Gold Prices and Other Influences, Northfield research

Do, Binh and Robert Faff. 2006. Does Simple Pairs Trading Still Work, Financial Analysts Journal,vol. 66, no. 4 (July/August): 83-95

Erb, Claude B. 2014. Gold, the 'Fear Trade' and Mr. Market, SSRN working paper

Erb, Claude B. and Campbell R. Harvey. 2012. An Impressionistic View of the Real Price of Gold Around the World, SSRN working paper

Erb, Claude B. and Campbell R. Harvey. 2012. The Golden Dilemma, SSRN working paper

Fama, Eugene F., Kenneth R. French. 1988. Dividend yields and expected stock returns, Journal of Financial Economics, 22: 325.

Ferson, Wayne E., Sergei Sarkissian and Timothy Simin. 2003. "Is Stock Return Predictability Spurious?,Journal of Investment Managementvol. 1, no. 3: 10-19

Gatev, Evan, William N. Goetzmann and K. Geert Rouwenhorst. 2006. Pairs Trading: Performance of a Relative Value Arbitrage Rule, SSRN working paper

Hillier, David, Paul Draper and Robert Faff. 2006. Do Precious Metals Shine? An Investment Perspective , Financial Analysts Journal, vol. 62, no. 2 (March/April):

99-106

Leamer, Edward E. 2008. Macroeconomic Patterns and Stories. Springer

Marks, Howard. 2011. The Most Important Thing: Uncommon Sense for the Thoughtful Investor. Columbia University Press

Tufano, Peter. 1998. "The Determinants of Stock Price Exposure: Financial Engineering and the Gold Mining Industry", Journal of Finance, vol. 53, no. 3: 1015-1052

Valkanov, Rosen. 2003. Long-Horizon Regressions: Theoretical Results and Applications, Journal of Financial Economics, 68: 201-232

https://www.cass.city.ac.uk/__data/assets/pdf_file/0005/69935/Gold-Stocks,-the-Gold-Price-and-Market-Timing.pdfhttp://www.cfapubs.org/doi/pdfplus/10.2469/faj.v70.n1.2http://math.nyu.edu/faculty/avellane/AvellanedaLeeStatArb20090616.pdfhttp://aida.wss.yale.edu/~shiller/online/jpmalt.pdfhttp://www.northinfo.com/documents/41.pdfhttp://www.cfapubs.org/doi/pdfplus/10.2469/faj.v66.n4.1http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2382937http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2148691http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535https://www.joim.com/abstract.asp?IsArticleArchived=1&ArtID=33http://papers.ssrn.com/sol3/papers.cfm?abstract_id=141615http://www.cfapubs.org/doi/pdfplus/10.2469/faj.v62.n2.4085http://www.amazon.com/Macroeconomic-Patterns-Stories-Edward-Leamer-ebook/dp/B003TU0X9Q/ref=sr_1_4?s=books&ie=UTF8&qid=1392661495&sr=1-4&keywords=leamerhttp://www.amazon.com/The-Most-Important-Thing-Thoughtful/dp/0231153686http://118.96.136.31/ejurnal/Working%20Paper%20JFE/JFE%2003%20Long-horizon%20regressions.pdfhttp://118.96.136.31/ejurnal/Working%20Paper%20JFE/JFE%2003%20Long-horizon%20regressions.pdfhttp://118.96.136.31/ejurnal/Working%20Paper%20JFE/JFE%2003%20Long-horizon%20regressions.pdfhttp://118.96.136.31/ejurnal/Working%20Paper%20JFE/JFE%2003%20Long-horizon%20regressions.pdfhttp://www.amazon.com/The-Most-Important-Thing-Thoughtful/dp/0231153686http://www.amazon.com/Macroeconomic-Patterns-Stories-Edward-Leamer-ebook/dp/B003TU0X9Q/ref=sr_1_4?s=books&ie=UTF8&qid=1392661495&sr=1-4&keywords=leamerhttp://www.cfapubs.org/doi/pdfplus/10.2469/faj.v62.n2.4085http://www.cfapubs.org/doi/pdfplus/10.2469/faj.v62.n2.4085http://papers.ssrn.com/sol3/papers.cfm?abstract_id=141615https://www.joim.com/abstract.asp?IsArticleArchived=1&ArtID=33http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2148691http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2382937http://www.cfapubs.org/doi/pdfplus/10.2469/faj.v66.n4.1http://www.northinfo.com/documents/41.pdfhttp://aida.wss.yale.edu/~shiller/online/jpmalt.pdfhttp://aida.wss.yale.edu/~shiller/online/jpmalt.pdfhttp://aida.wss.yale.edu/~shiller/online/jpmalt.pdfhttp://math.nyu.edu/faculty/avellane/AvellanedaLeeStatArb20090616.pdfhttp://www.cfapubs.org/doi/pdfplus/10.2469/faj.v70.n1.2https://www.cass.city.ac.uk/__data/assets/pdf_file/0005/69935/Gold-Stocks,-the-Gold-Price-and-Market-Timing.pdf

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Additional Materials

24

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Gold Mining Equity/Gold Price Metric

Many references to a ratio of a gold mining stock index price/gold price

Justification seems to be someone else said it works

Generally three versions of this metric

NYSE ARCA Gold Miners Index/Gold Price Ratio (GDM/Gold)

Philadelphia Gold and Silver Index/Gold Price Ratio (XAU/Gold)

NYSE ARCA Gold BUGS Index/Gold Price (HUI/Gold)

A low ratio is usually taken to mean that gold mining equities are cheap

Why not take it to mean gold is expensive?

25

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Gold and GDM Gold Miner Index

$0

$200

$400

$600

$800

$1,000

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$1,600

$1,800

$2,000

$0

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$1,200

$1,400

$1,600

$1,800

$2,000

IndexPrice

GoldPrice

Gold NYSE Arca Gold Miners Ix

26Note: Bloomberg data

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An Alternative Gold Miner Index

$0

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IndexPrice

GoldPrice

Gold PHILADELPHIA GOLD & SILVER INDX

27Note: Bloomberg data

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An Alternative Gold Miner Index

$0

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$600

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IndexPrice

GoldPrice

Gold NYSE Arca Gold BUGS

28Note: Bloomberg data

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Somewhat Different Gold Miner Index Price Performance

$0

$1

$1

$2

$2

$3

$3

$4

$4

PriceIndexedtoDecember1994Price

NYSE Arca Gold BUGS PHILA GOLD & SILVER INDX NYSE Arca Gold Miners Ix

29Note: Bloomberg data

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Gold Miner Index Price-To-Book Ratios And Miner/Gold Ratio

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 2.00

Price-To-BookRatio

(MonthlyObservations,10

/04to1/14)

GDM Index/Gold Price Ratio

(Monthly Observations, 10/04 to 1/14)

PHILA GOLD & SILVER INDX NYSE Arca Gold BUGS NYSE Arca Gold Miners Ix

30Note: Bloomberg data

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Philadelphia Gold and Silver Index (XAU)/Gold Price Ratio

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

PriceRatio

XAU /Gold Price Average Time Trend

31

Note: Bloomberg data

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NYSE ARCA Gold BUGS (HUI)/Gold Price Ratio

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

PriceRatio

HUI/Gold Price Ratio Average Time Trend

32

Note: Bloomberg data

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How Similar or Dissimilar Have the Price Ratios Been?

0.00

0.50

1.00

1.50

2.00

2.50

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

GDMP

riceRatio

XAUandHUIPriceRa

tios

XAU/Gold HUI/Gold GDM/Gold

33

XAU/Gold

GDM/Gold

HUI/Gold

If an index is cheap, the cheapness is only exploitable if the index is tradable

GDM is associated with a tradable ETF (GDX)

XAU has traded options

HUI is seemingly just an index

Note: Bloomberg data