Palisade Research - Tue, Dec 13, 2016

Gold Producers Have Underperformed And Will Continue to Lag - How To Take Advantage Of The Recent Gold Correction

picture of a huge mining truck

In the mining sector, there is an old adage that is often invoked at the beginning of a new bull market - "producers will move before explorers and developers." It might make intuitive sense, but the adage rings false...

Gold producers will always draw interest from generalist investors and the media due to their cash flows and larger market caps; however, gold explorers and developers are where the real gains can be made.

We completed an analysis of 40 producers, 95 developers, and 360 explorers to observe the relative performance of each group since the beginning of 2016. Our first chart measures the performance of the three groups relative to the price of gold, which was up 25% from January to August.

line chart showing the performance of gold companies this year until August

Cumulatively, producers notched impressive gains, rising 140% from January through August. Still, the producers underperformed explorers and developers substantially. Explorers gained 231% during the same period, while developers rose 264%.

Seeing that producers had the smallest gains of the three groups through August, rational observers might assume that the recent pullback in the gold sector would have affected them the least. That assumption would be totally wrong! Take a look at our next chart.

line chart showing the performance of gold companies this year from August until now

Since August, our sample of 40 producers has declined by 31%. Meanwhile, developers pulled back by 27% and explorers only fell by 13%.

The next logical question to ask is if this underperformance by producers is endemic to the early stages of gold bull markets or if this cycle has been an anomaly. To that end, we also examined the 2008 - 2011 bull market, this time using a basket of 21 producers, 76 developers, and 221 explorers.

line chart showing the performance of gold companies from 2008 to 2011

Once again, explorers and developers clearly outperformed the producers. From start to finish, the performance of the producers clearly lagged behind explorers and developers, though the divergence did become particularly wide in the latter stages of the bull market.

Overall, during the 2008 to 2011 gold bull market, producers gained 298%, while developers and explorers rose an eye-popping 711% and 605% respectively.

It is obvious, then, how to best take advantage of the recent gold correction - target the best gold exploration and development companies in the market and buy their shares. We expect the current bull market to last another four or five years, with the price of gold potentially breaking $5,000 per ounce. This means that explorers and developers are poised to reach astronomical heights.

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