[This blog post is an excerpt from a commentary published at www.speculative-investor.com last week]

This is our annual reminder that gold mining stocks should always be viewed as short-term or intermediate-term trades, never as long-term investments. If you want to make a long-term investment in gold, then buy gold bullion.

The reason is illustrated by the following weekly chart. The chart shows more than 100 years of history of gold mining stocks relative to gold bullion, with gold mining stocks represented by the Barrons Gold Mining Index (BGMI) prior to 1995 and the HUI thereafter. The overarching message here is that gold mining stocks have been trending downward relative to gold bullion since 1968, that is, for 56 years and counting.

We’ve explained in the past that the multi-generational downward trend in the gold mining sector relative to gold is a function of the current monetary system and therefore almost certainly will continue for as long as the current monetary system remains in place. The crux of the matter is that as well as resulting in more mal-investment within the broad economy than the pre-1971 monetary system, the current monetary system results in more mal-investment within the gold mining sector.

The difference between the gold mining sector and most other parts of the economy is that the biggest booms in the gold mining sector (the periods when the bulk of the mal-investment occurs) generally coincide with busts in the broad economy, while the biggest busts in the gold mining sector generally coincide with booms in the broad economy. The developed world, including the US and much of Europe, entered the bust phase of the economic cycle in 2022 and the bust is not close to being over. This means that we are in the midst of a multi-year period when a boom should be underway in the gold mining sector.

To date, the gold sector’s upward trend from its 2022 low hasn’t had boom-like price action. The main reason is that the current economic bust is progressing more slowly than is typical, largely because of the efforts of the US government to boost economic activity via recession-like deficit spending and the parallel efforts of both the Treasury and the Fed to boost financial market liquidity. A related reason is that during the economic bust to date the broad stock market has performed unusually well. This has meant more competition for the attentions of speculators and investors. The gold sector has been generating good operating results and stock market performance, but so have many other sectors.

We expect that over the next 12 months the gold mining sector will continue to demonstrate strong earnings growth while most other sectors see flat or declining earnings as the economy slides into recession. This contrast should lead to boom-like price action in the gold sector. In fact, we think that the HUI could trade north of 600 next year while remaining in its long-term downward trend relative to gold bullion.