Gold miners: three decades for naught

The Philadelphia gold and silver mining index (ticker symbol XAU) has been around since Jan 19, 1979, initiated at 100 with gold quoting $230.5. Fast forward to 2015 January 22: Gold topped $1302 (after the long anticipated QE-bazooka by the ECB), while the XAU closed at 81.12. Even though revenues per ounce are more than fivefold higher, the mining index lost 18.88% in 36 years.

When and how this all came about requires several graphs to draw the perspective:
The publicly available data series of the Philadelphia gold ans silver mining index (The ticker acronym XAU is used henceforth) starts on Dec 19, 1983. That day the XAU closed at 107.06 while gold was priced at $375. Let 's first start with plotting the XAU and the gold price in USD/oz (POG) over the complete time lapse from December 1983 till now. On the graph the POG in blue is using the left scale from running till $2000, while the XAU is using the right scale going up to 400. Five dollar for gold therefore translate to one point for the XAU.

Gold (blue on the left scale) and XAU (red on the right scale) since Dec 1983 (click to enlarge)

You may have noticed the XAU on the Kitco precious metal price table. The table also mentions the Gold / XAU ratio, which is a measure of how cheap or expensive gold mining shares are relative to gold. With the XAU in the denominator, a low reading implies gold shares expensive relative to gold. The higher the ratio, the cheaper gold mining shares get relative to the yellow metal. This ratio is plotted in the below graph over the complete 1983-2015 time interval.

Gold/XAU ratio since Dec 1983 (click to enlarge)

You immediately notice the autumn 2008 breakdown of the gold mining sector under stress. I will leave this catastrophe for later on and first focus on the 20th century with a few similar and more detailed graphs.

The 20th century equilibrium

During most of the 20th century, the red XAU graph constantly tops the blue POG. It only occasionally dips below and makes a nice rally in 1993, which makes the XAU progress considerably above its PoG 20th century 'support-line'. You see this in more detail in the below graph running till end 1997. The below graph runs from $200 till $640 for gold and from 50 points till 160 for the XAU, such that $4 for gold translate to one point for the XAU. We may consider this '4:1 yardstick' to be a 20th century equilibrium level. As gold rallies, the XAU tends to outperform and with gold weakening, the XAU tends to slide even faster, leveraging down the gold slump.  Such also is the case during 1997.


Gold (blue on the left scale) and XAU (red on the right scale) 20th century: 1983-1998 (click to enlarge)

When having a look at the Gold/XAU ratio during that period, you immediately grasp the logic: During 1993, gold mining shares get valued higher, rallying more than does the price of gold. the Gold/XAU ratio drops throughout 1993. After a pull-back in 1994, miners gain strength again in 1995 to attain their best reading by the end of 1996 as gold tops $400. The Gold/XAU graph runs a few years further, illustrating the impact of the final gold bear market around the turn of the century. As gold slides below $280 gold mining shares plummet, making the Gold/XAU ratio peak above 6 in November 2000.

Gold/XAU ratio from Dec 1983 till July 2001 (click to enlarge)

With the end of the gold bear market, we have turned the page on the 20th century. A few more graphs await us.

The 2001-2011 secular gold bull market

The below graphs start at the turn of the century. Major ticks again cover two years, with minor gradations for six months.


Gold (blue on the left scale) and XAU (red on the right scale) in the 21st century (click to enlarge)

As in the extended graphs over the complete time range, Gold and the XAU use the left and right scale respectively. The scales again differ by a ratio of 5. During the early gold bull years, the XAU curve repeatedly rallies above the gold price. As can be noticed in the below graph, the Gold/XAU ratio occasionally breaks below 4, which was its 20th century equilibrium level. Despite gold strengthening, gold mining shares have a hard time catching up with the yellow metal. Especially as gold breaks its Jan 1980 all time high by early 2008 and further steams up to break $1000 in March, the Gold/XAU ratio no longer touches down to four, but rather hovers around five. As gold comes off its March 2008 peak, the XAU breaks down, with the Gold/XAU ratio easily topping six and breaking above its gold bear market peak value. Gold mining shares were particularly weak performers during the few months preceding the autumn 2008 financial crisis.

Gold/XAU ratio since Jan 2000 (click to enlarge)

During the financial crisis, gold slides towards $700 (about 30% below its March 2008 peak level). Gold miners really get slashed, sending the Gold/XAU to a peak above 11. The yellow metal makes an initial swift recovery, dragging the miners from the swamp. Towards 2010, miners recover, outperforming gold after their terrific slide. The above Gold/XAU graph however also shows that they don't regain their previous strength, with Gold/Xau stalling above 6. Remember that this was the Gold/XAU reading during the worst days of the gold bear market around the turn of the century. Despite gold breaking above its March 2008 top permanently, there seems something essentially wrong with the gold mining sector.

Gold peaking and entering a new bear market

The last two graphs are dedicated to the final stage of the gold rally, with the yellow metal peaking above $1900 in August/September 2011 and the onset of the gold bear market which brought it back to a post 2011 intra-day low near $1130 by mid December 2014.

Gold (blue on the left scale) and XAU (red on the right scale) since April 2010 (click to enlarge)



The graph now shows gold on the left scale running between $1000 and $2000 while on the right scale, the XAU reading is between 0 and 250. Purposely, the scales no longer are proportional. We start off in April 2010 as the XAU continues rising in tandem with gold. By the start of 2011, the XAU peaks above 200, with gold reaching $1400. Yet during the final ascent of gold towards its August/September peak, gold mining shares are unable to make any progress. As we write 2012 a perfidious logic is developing, with the XAU now proportional to the (Gold - 1000).  Following that logic, we would face a total destruction of the mining sector if ever again gold would touch below $1000/Oz. The perfidious non-linear logic 'fortunately breaks down' as gold drops down from its trading range, entering into a bear market with repeated plunges towards $1200/Oz and finally breaking below last December. Not that this implies any salvation for the gold mining shares. As shown in the last Gold/XAU graph, which peaks above 18 or nearly three times higher than during the gold bear market around the turn of the century.



Gold/XAU ratio since April 2010 (click to enlarge)

The 2013 and 2014 short gold recoveries only managed to make Gold/XAU ease a little towards a reading of 12. Notice that even that is above the value reached in the heat of the financial crisis during autumn 2008. And worse was to come. As gold started weakening again by September 2014 and almost throughout autumn, the Gold/XAU ratio made its dramatic final jump, reaching 18.9 as the XAU plummeted to 63.15 by the close on Dec 16, 2014.

With gold topping $1300 last Thursday (as the ECB announced its QE bazooka) the XAU still was lingering above 80 or over 24% lower than in December 1983, when gold quoted $375 Oz. Despite the onset of a recovery as we started 2015, Gold/Xau only is off its top to a reading around 16. There is no exaggerating in claiming a permanent impairment for the gold mining sector: the glorious days are not coming back. Three decades lost made the sector lose its lustre.

A final comparison:

Date	19/12/1983	22/01/2015
DJI average	1,244.61	17,813.98
S&P500	162.32	2063.15
Nasdaq Comp.	275.58	4750.4
XAU	107.06	81.12
Gold	375.00	1302.10

However oversold the gold mining sector still is and however appealing the short term gains may be, it should be borne in mind that buying into the gold mining sector is a tactical move with the perspective of gains on a short or medium term time frame. The past amply proves it to be the wrong strategic investment over the long haul.

Further reading

Decades of under-performance (Feb 2011) The article is using the same approach as the current one with an additional graph going back to before WW-II.  This article was written as miners failed to catch up with gold prices rising. It has been ominous for what was to follow.