It makes perfect sense, as the HUI Index includes only gold miners and excludes companies using long-term hedging, reducing the sensitivity of bullion’s price volatility. For example, during the financial crisis in 2008, the HUI index collapsed by 70.6%, while the XAU Index plunged 68.2%. Given the fact that the price of bullion fell around 30%, the leverage offered by gold miners was higher than two in that period. Investors should always remember that leverage provided by gold stocks enables magnifying both gains and losses from the bullion market, as in our example. It also shows that gold behaved as a safe-haven asset when compared to mining stocks during the financial crisis, despite the initial price decline.

However, the conventional wisdom about the leverage offered by gold stocks does not hold in the long-term. As one can see in the chart three, bullion outperformed both indices of gold mining companies in the long-run. The price of gold is now more than three times higher than in 1996, while the HUI Index is only 8.7% higher and the XAU Index actually lost almost 40% of its value in the last twenty years. It means that the gold mining equities performed relatively poorly compared to gold. Of special interest is the fact that their performance was also weak when compared to the general stock index, such as S&P 500, through that period.

Summing up, mining shares are correlated with the price of gold, but they should be viewed as a different asset class than bullion and related derivatives. Gold is insurance against market turmoil with no counterparty risk, while mining companies clearly have such exposures. Investors can limit the distinctive risks associated with particular mining businesses by investing in some indices of gold stocks. However, they do not track the price of gold accurately since they include companies producing other metals or the heavy hedging. The general stock market trends affect mining stocks in a different way than they do for gold. The mining stocks also behave distinctly during business cycles. Despite the conventional wisdom about the leverage offered by gold stocks, historical analysis shows that in the long-run bullion outperformed mining equities. It means that for long-term investors who would like to get full exposure to gold – especially for some insurance against black swan events – it makes sense to buy bullion, futures or ETFs rather than to invest in gold miners. Investors who want to invest in gold shares should consider active trading rather than adopting a “buy-and-hold” approach.