"Looking at gold price reaching new highs I wonder why gold shares don't follow. Is it usual? Is it a signal for gold future? Have the companies hedged their production at lower prices so they are not earning the gold upside? I would like to know your thoughts if possible. Some talk about manipulation on gold stocks ETF being much easier than physical gold, but it sounds nonsense, at least for me. Thank you David for your useful help and superb coaching."

David Fuller's view Thank you for your kind words.

I do not think that lagging gold shares are a signal for bullion, and I certainly do not feel that they are being manipulated.

Yes, it is normal for them to underperform the metal on many occasions within an overall upward trend, and there are two main reasons for the current divergence.

When the price of bullion is strong and rising, mining companies extract and process lower grade ore to prolong the life of the mine. Conversely, when bullion prices are depressed, they mine the 'eyes' - rich seams in order to remain profitable. Since lower grade ore is more expensive to mine, profits do not rise as much in the bull phase for bullion as investors might hope.

The other important factor is the overall performance of global stock markets. If they are mostly in ranging corrective phases as we see today, this will be a headwind for gold mining shares, even when the bullion price is rising. However, if stock market investors are in a confident mood, mining shares will often trade at higher valuations than we see today.

We should also remember that mining shares face more risks, such as strikes, poor management decisions, windfall taxes, accidents, environmental regulations and expropriations, before we even consider that mines are wasting assets. Nevertheless, they will run hot on occasion, due to ore upgrades, new discoveries and takeovers. Mines may also outperform for several years after bullion has peaked.

This historic chart shows gold bullion divided by the Philadelphia Gold and Silver Index of shares. Bullion is still rising relative to the shares. Therefore, even though the value of mining companies is improving relative to bullion, the divergence is more likely to increase before it next narrows.