Valuation and Strategy for Gold Stocks*

A mong American portfolio managers who have owned gold-related securities, there has been a general inclination to buy gold mining equities rather than gold, the metal. Elsewhere in this Journal the views of an experienced gold dealer are presented. Our limited objective in this study is to present some empirical evidence on the relationship between gold prices and returns on gold mining equities, and not to analyze the determinants of the price of gold. A distinction is sometimes drawn between gold, the metal, as ”a non-productive, speculative asset” and an operating gold mine as a dividend paying “productive enterprise.” In fact, gold and gold equities are obviously closely related, and we have attempted in this paper to outline a framework and to measure this relationship over time. The findings are consistent with an attitude toward gold mining equities held by many European portfolio managers who focus more on diversification and less on the speculative elements of short-term positions keyed to gold price changes which are very difficult to predict.