- Share prices of gold-mining companies have lagged gold itself
during the metal's recent run to record highs.
Analysts and fund managers attribute the stocks' collective
underperformance to a simple preference among many investors to
hold the metal itself at the moment, as well as rising operating
costs for mining companies that limits profits even when they are
also fetching high prices for the gold they sell.
Gold has surged in 2011 due to inflation worries, civil unrest
in the Middle East and North Africa, sovereign-debt issues in
Europe and the U.S., plus a weak U.S. dollar. June gold hit a
most-active-contract record of $1,509.60 an ounce Thursday on the
Comex division of the New York Mercantile Exchange. This
represented a 5.9% gain for the year.
However, the Philadelphia Gold/Silver Index (
) of mining stocks was nearly flat for the year to date. The Gold
Bugs Index (HUI) of unhedged gold stocks was up 4%.
There also has been an underperformance by silver stocks as
silver rocketed to 31-year highs, said Daniel Brebner, head of
metals research at Deutsche Bank.
Shares of gold producers have outperformed gold itself for
much of the bull run that began around a decade ago, said Jeff
Clark, precious-metals analyst with Casey Research. Up through
2007, this often occurred at a rate of three or four to one, he
Depending on the index, gold stocks outperformed gold by
roughly four percentage points last year, Clark said. "And now
year to date, they are not outperforming gold as a group."
Some analysts cited a desire among many investors in the
current environment to hold the metal itself as a hedge against
geopolitical and economic concerns. This especially the case due
to the "immediacy" of owning gold via investments such as coins
or exchange-traded funds, Brebner said.
"When you buy an equity, you're buying future gold-future
production or ounces," Brebner said. "When you buy gold through
an ETF or direct, it's not future. It's now. A lot of investors
are looking at risks much more immediate than five or 10 years
Rising Mining Costs Cited As Factor Limiting Advances For Gold
As commodity prices soar, so do the expenses for mining
companies. Labor costs are also increasing in many nations.
"The exposure that you get to the gold price is diluted
through the equities because they are seeing that kind of cost
inflation," Brebner said. "The earnings performance of many of
the senior gold-mining companies, or the earnings growth, is
lower than what you're getting from the performance of the gold
Energy is one of the most significant costs for mining
companies, said Mark Johnson, portfolio co-manager for the USAA
Precious Metals and Minerals Fund. June crude oil on the New York
Mercantile Exchange earlier this month hit $114 a barrel for the
first time since August 2008. The market has been factoring in an
expectation that the impact of various rising costs will be
reflected in first-quarter earnings reports from producers,
These costs are also occurring in other types of mining, such
as copper and coal, said Kimberly DuBord, director of research
for Briefing Research. "It's not just gold miners," she said.
Coal prices have been supported by tight market, with U.S. coal
being exported. Yet, she continued, share prices of some coal
producers took a "huge hit" in the last month.
Strong currencies in key mining nations such as Australia and
Canada also cut some into the profitability of mining companies,
Johnson explained. Companies receive payment in U.S. dollars,
which is how gold is priced on the global market. But when a
currency such as Canada's strengthens, the company's expenses
rise when translated into U.S. dollar terms, even if those costs
held steady in terms of the Canadian dollar.
Brebner also said it is becoming increasingly challenging for
many companies to keep boosting mining output.
Meanwhile, mining companies face political risk in certain parts
of the world, analysts said. There are worries about some nations
basically taking away a majority stake in mines after companies
spent huge sums of money developing them. Further, there have
been attempts by governments to hike taxes or royalties on mines,
even in some nations normally perceived to have a low political
risk for miners.
Analyst: Mining Stock Underperformance Suggests No
'Mania' Forming Yet
Clark sees the underformance of mining equities versus gold as
a sign that a "mania" some fear has not occurred yet. This would
be a condition in which so many investors suddenly pile into a
market that a bubble forms, such as the Nasdaq and real-estate
market crashes since the turn of the century.
"That is probably the most important point that can be made,"
Clark said. "If the mania was really here-and one might think
that is the case the way gold and especially silver are running
to the upside--you would think gold stocks would not only be
outperforming the metals but demonstrating three to four times
the leverage that they have in the past. And they're certainly
not doing that. So that's a clue we're not there yet."
Nevertheless, he said, the current situation could portend
some type of consolidation or correction. This likely will "wash
out" some newcomers to the market. "And of course, that will be
the best time to buy," Clark said.
Analysts offered mixed views on whether mining stocks will
continue to underperform the metal itself.
"I don't see any convincing reason at this stage why that
trend will reverse," Brebner said. "I think it's likely to
continue over the next couple of years and actually it may
worsen, if there is a growing desire for investors to get their
hands on metal. That may exacerbate the underperformance of
mining companies versus the commodity."
However, DuBord looks for the mining shares to close any gap with
the metal. "I think they will catch up over time," she said,
suggesting there might be a move toward diversified miners who
produce more than one metal.
Clark looks for gold stocks to eventually regain the upper
hand, particularly when "non-gold types" enter the market on a
larger scale. These new investors tend to turn to the metal
first, he explained.
"People outside of our industry are starting to look at gold
and silver," Clark said. "That's the first place they're going to
go. They haven't gone to the stocks yet. And once they do, that
is going to be the catalyst, I think, that will push gold and
silver stocks up much higher.
By Allen Sykora of Kitco News;