Declining Equity Leverage to Gold Prices

The 4.7% gold price rise on Friday was accompanied by a 4.8% rise in equity prices, measured by the Market Vectors Junior Gold Miners exchange traded fund (GDXJ). The validity of the conventional wisdom that gold equity prices are likely to beat any rise in gold bullion prices depends on the time period chosen. It also depends on equity market conditions at the time. A rise in the price of gold due to financial market disruptions, such as occurred last Friday, may result in modest or little gains in equity prices if they are accompanied by weakening equity market conditions. Since the beginning of 2016 (the period depicted in the chart), the gold price has risen 24%, predominantly within the first quarter of the year. Over the same period, the gold miners fund rose by 117% most of which came after the conclusion of the first quarter. One inference from the relative moves is that stock buyers need convincing about the sustainability of a gold bullion price increase before deciding to embed the change in equity prices.