Gold Proves No Haven From Zero Interest Rates

World Gold Miner Participation in Post-Nov. 2005 Breakout Was Weak Raw Data from Bloomberg

Prior to November 2005, marked in blue, the relative performance of gold miners was an extremely strong multiple of gold prices. After November 2005, the effect is weak. Anyone who bought gold bullion on Nov. 16, 2005 at $479.30 per ounce has close to a 70% total return using the Dow Jones methodology; the return on the mining index is more than one-sixth of that.

The results do look better in dollar index-adjusted terms. Here we split the data one more time, this time with the Aug. 17, 2007 emergency rate cut; the data points are marked in green. But considering the travails of the dollar during the August 2007 to April 2008 period and the drive of short-term interest rates to zero, this sort of tepid performance is not what gold bugs dreamed about for years.

World Gold Miner Participation in Dollar Index-Adjusted Terms Raw Data from Bloomberg

Commodity-linked equities and commodities are not the same thing. The gold miners faced rising operating expenses, especially for energy and power and for labor. The commodity, much of which had been mined years earlier and was sitting in vaults around the world, had no such encumbrances.

The moral of the story is if you want to be long gold, be long gold. Do not buy mining stocks unless you are in the early phases of the next bull cycle in gold. (Hint: You are not.)

---

Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.