By Jeff Clark, Casey Research

Let’s just admit it: we’re invested in gold stocks not just to make money, but for the chance to change our lifestyles. And with their lackadaisical year-to-date performance, one may begin to wonder if they’re still going to bring the magic.

While the answer will depend as much on the individual investor as it does the market, let’s look at some historical patterns to get a hint as to how similar or different our situation is to past bull markets, as well as what realistic expectations we can hold about the future.

The first thing I wanted to know is if there is historical precedence for gold stocks to underperform gold during a bull market. If so, then maybe what we’re experiencing isn’t out of the ordinary, and more importantly, wouldn’t necessarily mean they are destined to continue lagging. And that brings us to our first historical observation…

Gold stocks underperformed gold for two years prior to the 1979-‘80 mania. What many frustrated investors don’t realize is that leading up to the blow-off top in gold in 1980, gold producers lagged the metal for two full years. From January 1977 through the end of 1978, gold rose 58.4%. But gold stocks, as measured by Barron’s Gold Mining Index, were up only 11.7%. The metal outperformed the producers by a margin of four to one, despite it being the middle of a bull market.

Today, gold is up 26.5% year-to-date (through September 19), while gold stocks (GDX) have risen only 3.2%. This is a similar pattern to the pre-mania behavior of the last bull market; it tells us that the current relationship between gold and the equities is not abnormal.

Let’s look at the mania itself and see what else we can learn. Here’s a chart of gold and gold stocks in 1979 and 1980:

(Click on image to enlarge)

Once the mania began, gold producers returned roughly four times the money. From January 1, 1979 through their peak in October, 1980, gold stocks rose $293.6%. The metal gained 274.8% during its part of the mania, hitting its pinnacle of $850 on January 21, 1980.

The big action was with the juniors and explorers; the average return of 15 companies we sampled was 2,313% during this 22-month period. What’s ahead could be truly spectacular.

Gold stocks peaked nine months after gold. The April Fool’s joke in 1980 was on those who thought the bull market was over at that point. What’s important to realize is that the public’s biggest shift from gold to the equities occurred after gold’s blow-off top.

Regardless of the extent to which the public may be buying gold today, it’s clear gold stocks aren’t on their radar screens. If history is any guide, they will be.

Gold stocks did well in spite of the world being a tumultuous place. Inflation was over 12% in 1980 and interest rates hit 13.5%. Two recessions occurred in the late ‘70s and early ‘80s. An oil crisis hit in 1979, and Iraq invaded Iran. In the midst of all this, gold stocks soared.

With our debt and currency concerns demonstrably worse now, one could easily argue that our present environment is even more supportive of the gold industry.

Gold stocks exploded even though the S&P was subdued. The S&P rose 36.8% in the same time frame (1-1-79 through 10-20-80)… Not too shabby. But gold stocks outpaced it almost eightfold. To give you a sense for how much that is, it would be akin to Barrick – currently priced around $53 – selling north of $200, while the S&P climbed to 1,647 from 1,204.

I think there’s one last lesson from these data.

Make sure you invest in gold and not just gold stocks. Not only is your risk decidedly higher if you invest solely in equities, you lack an alternate form of money that has been used repeatedly throughout history. You’d hate to be part of the mania only to see one or more of your stocks plummet from a political issue or flatline because of a management problem. Gold, meanwhile, will be serving its unfaltering role as money – what I use for a large chunk of my savings. Don’t make the mistake of thinking you don’t need gold just because you own gold stocks.

So, will gold stocks bring us riches? History doesn’t repeat in exact terms, but it usually rhymes. And given our similarities to the last great bull market, I think we’re in the right place.

[Did you know that investment funds are buying gold at just $900… even though its price is well above that? Read this free report to learn how they do it – and how you can too!]