CapitalTime

Articles on investing and capital management, with a quantitative focus.

Don’t Buy Gold Miners

2025-04-22

My portfolio includes gold bullion, meaning just the metal. I want to make it clear that I don’t invest in gold mining stocks, and in this post I will explain why they are bad investments.

It seems like every time there is a bull market in gold, people become excited about mining stocks. The usual sales pitch for gold stocks is that they enhance (or leverage) the exposure to gold.

Here’s why I don’t like gold miners:

Inferior characteristics vs bullion

This chart compares the benchmark gold miners ETF to bullion, over 19 years. I’m showing US-based data, but Canadian ETFs show the same relationship.

Note that gold (bullion) has appreciated very significantly over this time. The miners, however, have much lower performance. But the story is much worse than just the performance:

Note the difference in volatility between these two. The miners have more than twice the volatility of bullion! The maximum drawdown of miners was significantly worse as well.

The Sortino ratio is a useful measure of risk-adjusted return (higher = better). Bullion shows a significantly better risk-adjusted return, which takes into account both the performance and volatility.

This comparison alone should make it clear that gold miners are bad investments.

Correlations

From a portfolio design standpoint, the major appeal of gold is that it has very low correlation with stocks and bonds. In a previous post, I explained the diversification benefit with nearly zero correlation to stocks.

Gold miners are a different story. They have roughly 0.3 correlation with global stocks, and more like 0.5 correlation with the Canadian stock market.

To maximize the diversification benefit of gold, I think it’s best to use pure gold bullion.

Scams and frauds

There’s a long history of scams and frauds in mining stocks. Obviously, there are many legitimate mining companies, but there have also been so many scams in this sector that any investor should beware of the high probability of fraud.

Junior miners and exploration companies are extremely high-risk ventures, even if they are legitimate businesses. Because of low valuations, they tend to be penny stocks or micro cap stocks. They also tend to be popular with speculators.

I think that the highly speculative nature of these exploration companies can blur the lines between a bad company and a fraud. Perhaps this also gives some plausible deniability to executives. Whatever the reason for the connection, beware that there is a long history of mining stock scams and “pump and dump” schemes.

— Jem Berkes