For much of the past four years, gold miner ETFs have risen less
than physical funds. In some ways that's not surprising, since
returns of equity funds like the Market Vectors Gold Miners ETF
(NYSEArca:GDX) correlate much less to the price of gold than the
likes of GLD, which hold actual gold.
Since September 2008, SPDR Gold Shares (NYSEArca:GLD), the $74
billion bullion ETF, has returned 107.4 percent, or about three
times as much as the SPDR S&P 500 ETF (NYSEArca:SPY).
An article in Barron's this week pointed to technical factors at
play. First, the price of gold versus gold equity has been
artificially high over the past few quarters and is now leveling
back to a more "normal" ratio.
Another reason is that the gold mining industry has been quite
inefficient, putting downward pressure on profit margins. The past
few years have been marked with heavy expenditures, with relatively
little new profit streams to show for it. For example, deep-level
mining in South Africa has been plagued by safety issues, depleting
ore quality, poor infrastructure and skill shortages.
These inefficiencies and a series of acquisitions characterized
by low valuations made investors squirmy.
However, according to the Wall Street Journal, there's a lot of
evidence suggesting mergers with little or no premiums may be the
ticket to increasing profits in the gold mining industry.
Typically, these types of mergers have no designated "new
owner," and are instead consummated for mutual benefit. The success
in such ventures usually comes sometime after the deal closes, as
weaker companies combine to become one stronger entity with lower
It's easy to see how economies of scale can only be a benefit to
a resource-intensive industry such as mining. Then again, culture
clashes and management infighting aren't unheard of.
One final factor is worth mentioning. As I wrote in a previous
blog, gold miner ETFs often hold companies that mine metals and
minerals other than gold.
Since gold is arguably the least cyclical metal-investing in
companies that extract metals besides gold helps fuel price
increases when consumer demand rises for products that use, say,
rare metals in manufacturing. China's fascination with the iPhone
and other electronics is an example of this.
A lot of cross-currents are at play here, but gold miners are
finally outperforming gold like so many have said they would, and I
for one am excited to see if their Cinderella moment will last.
At the time this article was written, the author held no
positions in the securities mentioned. Contact Ana Kostioukova @
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