And The Leverage Is...Where?

One of the talking points regarding gold-mining shares is that they tend to go up faster and stronger than gold itself, becasue of a leverage factor. Since miners have costs, they only net a fraction of the total gold price when they sell what they've produced. However, assuming their costs remain the same, they net a full dollar of every dollar increase in the gold price. If those costs don't rise along with the bullion price, then they would disproportionately benefit from a gold bull market.

Example: a gold miner whose costs are $500/oz grosses $300/oz when gold's at $800. If gold goes up to $1100, then the mining company's gross doubles to $600. Gold itself has risen only 37.5%, but that miner's gross profit margin has risen 100%. That's the effect of capturing a full dollar on every dollar rise.

Given this schematic, we would think that the NYSE Arca Gold Bugs gold mine stock index (the HUI) would be outpacing the SPDR GoldShares trust (GLD). Unfortunately, that hasn't been the case for the last five years:



GLD, which tracks the price of bullion, is the black line. The HUI is the gold line. As should be clear from the chart, the above leverage either isn't there or isn't reflected in gold-mining share prices.

Of course, the stock-market collapse had a lot to do with it - but even before, the HUI basically tracked the bullion price. (If you're interested, the flaw in the above schematic is the assumption that costs willl remain fixed.)


Chart courtesy of BigCharts.com.