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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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$400
$600
$800
$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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$600
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$1,000
$1,200
$1,400
$1,600
$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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$400
$600
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$1,000
$1,200
$1,400
$1,600
$1,800
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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
-$600
-$400
-$200
$0
$200
$400
$600
$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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$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$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
0.00
0.20
0.40
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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$1,400
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$1,800
$2,000
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=20785358/13/2019 SSRN-id2398172
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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/35404638878/13/2019 SSRN-id2398172
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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.pdf8/13/2019 SSRN-id2398172
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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.pdf8/13/2019 SSRN-id2398172
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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
$1,200
$1,400
$1,600
$1,800
$2,000
$0
$200
$400
$600
$800
$1,000
$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
$50
$100
$150
$200
$250
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
IndexPrice
GoldPrice
Gold PHILADELPHIA GOLD & SILVER INDX
27Note: Bloomberg data
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An Alternative Gold Miner Index
$0
$100
$200
$300
$400
$500
$600
$700
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
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
8/13/2019 SSRN-id2398172
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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
8/13/2019 SSRN-id2398172
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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
8/13/2019 SSRN-id2398172
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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
8/13/2019 SSRN-id2398172
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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