Why Gold Shares Underperform Gold Bullion

The relationship between gold mining shares and gold bullion is often misunderstood. While gold miners move with gold prices because their revenue depends on the price of gold, they exhibit a clear long-term underperformance compared to the physical metal. We explain why gold shares underperform gold bullion.

The article is based on a study called Gold Shares Underperform Gold Bullion by Dirk G. Baur, Lichoo Tay, and Allan Trench.

Gold stocks underperom the gold price

The source material, which studied the investment performance of gold miners (represented by the ETF GDX) relative to gold bullion (ETF GLD) from 2006 to 2025, reveals a stark performance gap:

• Over this 20-year period, gold miners underperformed gold bullion by approximately -350%.
• The annualized underperformance was -6.5%.
• The gold miner ETF (GDX) delivered a total return of 26%, while the gold bullion ETF (GLD) returned 373%.

The Core Mechanism: The Tyranny of Finite Mine Life

The primary reason hypothesized for the persistent systematic underperformance of gold miners is the finite life of mines.

• Reserve Depletion: Gold mines generally have a finite reserve life, often less than 10 years.
• Need for Replacement: To keep their value constant and match the returns of physical gold, miners must continually replace the gold they mine with new reserves.
• Costs and Execution Risk: Reserve replacement—whether achieved through exploration or corporate acquisitions – incurs risk, capital investment, time, and additional fixed costs. This execution risk contributes directly to the persistent underperformance relative to gold bullion.
• Valuation Decay: If a gold mining company does not replace its reserves at zero cost, the discounted sum of all future cash flows (and thus the valuation of the company) will naturally fall over time.

The Double-Edged Sword of Leverage and Volatility

Gold mining shares offer leveraged exposure to gold prices (a gold beta typically larger than one). This is because the costs incurred by miners create operational leverage: if gold prices rise by 10%, the miner’s profit margin may increase exponentially.

However, this leverage comes with two major drawbacks that prevent long-term outperformance:

• Higher Volatility: Gold mining shares are significantly more volatile than gold bullion. The gold miner index (GDX) is more than two times more volatile than gold bullion.
• Increased Downside Exposure: In gold bear markets, the leverage mechanism works in reverse, implying that gold mining shares will fall by more than gold bullion.

Furthermore, gold miners (GDX) exhibit a positive leverage effect, meaning negative shocks increase volatility more than positive shocks. In contrast, gold bullion exhibits an inverse or insignificant leverage effect, consistent with its role as a safe haven.

A Plethora of Downside Risks

Unlike gold bullion, which faces relatively few risks beyond price fluctuations, gold miners are exposed to “a plethora of downside technical and non-technical risks”. These risks act as a constant drag on returns:

• Operational and Technical Risks: This includes risks related to exploration, mine project development, and general operational challenges to gold production.
• Country and Governance Risk: Gold miners face exposure to country risk (such as land access, regulatory, and permitting issues), social risk (strikes, civil unrest), and governance risks including corruption.
• Environmental Liabilities: Miners incur fixed costs related to ongoing environmental and rehabilitation obligations, as well as mine closure costs and environmental externalities.
• Financial Hedging: Miners may enter into hedging agreements that limit their upside exposure to rising gold prices, and these contracts also incur transaction costs.
• Cost Dynamics: Mining costs tend to follow prices upwards but with a lag, meaning that when the gold price declines, rising costs can result in lower margins and returns.

Performance in Different Market Conditions

The underperformance is not constant across all market cycles.

• Long vs. Short Horizon: Systematic underperformance emerges only over longer horizons. Over short 3-month forward-rolling periods, there is no systematic underperformance on average.
• Crisis Periods (Safe Haven Failure): The study shows that gold mining companies do not act like a safe haven. During a stock market crisis (where returns are below the 5% quantile), gold miners decouple from gold bullion (lower gold beta) and recouple with the market (larger market beta). This leads to sharp declines when stock market losses are large.
• Bull vs. Bear Markets: Miners underperform especially in gold bear markets. While they exhibit leveraged exposure, they achieve only marginal underperformance in gold bull markets.

Investment Conclusion: The Diversification Trap

The overall conclusion is that a buy-and-hold strategy in a diversified gold miner portfolio offers limited benefit if the goal is to track or outperform the gold price.

While some individual mining companies do outperform gold bullion, 24 out of 62 firms analyzed over the 2006–2025 period outperformed GLD, holding a large portfolio of gold miner shares, such as through an ETF like GDX, diversifies away the idiosyncratic upside of these successful individual miners.

Given that investors can gain direct exposure to gold prices efficiently through physical gold bullion holdings or bullion ETFs (like GLD), there is no need to rely on gold mining companies for this purpose.

The future potential for miners: The authors suggest that gold mining shares might gain a compelling value proposition and potentially outperform gold bullion if investors start seeking “accountable gold miners” that can guarantee their gold is sourced according to ESG best practices, as the provenance of physical gold bullion is often hard to prove.