The Barron’s Gold Mining Index (BGMI) goes back all the way to 1939 - but unfortunately it is not updated automatically. The "Philadelphia Gold and Silver Index" (XAU) is an index of thirty precious metals mining companies and it goes back to 1983. Today, the XAU is THE benchmark for companies in the mining sector for precious metals. This comparative chart shows how the mining stocks perform compared to the metals that they produce. It demonstrates that over the long run - the physical metals tend to outperform the mining stocks.
Measuring the BGMI in Gold (instead of dollars) indicates that Gold is outperforming the stocks and that the ratio is going lower over time. Since the BMGI is not updated automatically the XAU/Gold ratio is placed below.
The XAU/Gold ratio gets updated daily. However, it only goes back to 1983.
This chart contains BGMI data before September 19th 2005 and XAU data thereafter. Doing so leads to an automatically updated chart that correlates very strongly with the actual BGMI/Gold ratio.
The chart above displays the 1-year rolling correlation coefficient between the price of gold and the Philadelphia Gold and Silver Index (XAU). A correlation coefficient of +1 indicates a perfect positive correlation, meaning that the price of gold and the XAU moved in the same direction during the specified time window. Conversely, a correlation coefficient of -1 indicates that they moved in opposite directions. The chart shows that the XAU and the price of gold tend to be positively correlated. The correlation coefficient is important for diversification because it helps investors assess the potential benefits of including the two assets in their investment portfolios.
Diversification is the practice of spreading investments across different asset classes to reduce risk. In his book Principles, Ray Dalio called diversification the “Holy Grail of Investing”. He realized that with fifteen to twenty uncorrelated return streams, he could dramatically reduce the risks without reducing the expected returns.
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