by Matthew Carr, Investment U Commodities Specialist
Friday, August 12, 2011: Issue #1577
If you hold gold mining stocks in your portfolio, you’re probably a little miffed at the moment.
While the Dow Jones Industrial Average lost 1,880 points between July 21 and the morning of August 11, the price of gold shot up 10.5 percent. And that included a launch upward of six percent to start this week.
But gold mining stocks haven’t benefited from the price of gold. Except for around a five-percent pop on Wednesday, most gold mining stocks were pummeled alongside the broader market. The Market Vectors Gold Miners ETF (NYSE: GDX) tumbled over six percent from August 3 to August 8 as the price of gold was picking up speed.
Earlier in the year, we started seeing gold miners’ performance disconnect from the momentum in gold during a correction in gold prices in late January. By May, the spread in performance between gold miners and physical gold accelerated.
The Gold Bug Frustration
Since February, gold and metals miner Agnico-Eagle Mines Ltd. (NYSE: AEM) is down 16 percent. During the same span, the price of gold is up $400 per ounce – a 29.5-percent increase. Like plenty of other gold miners, AEM is struggling to rebound from highs in December 2010. And a fire at one of its mining operations, which forced the company to lower staffing levels and in turn lowered production levels, has weighed on AEM’s shares further.
But Agnico-Eagle isn’t alone in struggling over the last six months…
- Kinross Gold Corp. (NYSE: KGC) is down 6.3 percent.
- Great Basin Gold (AMEX: GBG) is down 25.5 percent since February.
- IamGold (NYSE: IAG) is down 8.4 percent.
- And Newmont Mining (NYSE: NEM) is down a modest one percent.
And junior gold miners have been hit even harder.
Now, there are some exceptions, like Yamana Gold (NYSE: AUY), which has gained 20 percent since Valentine’s Day. Plus, Goldcorp (NYSE: GG) and Eldorado Gold Corp (NYSE: EGO) are both up over 10 percent during the same stretch.
So, by and large, we’ve had this tectonic shift. We had seen in 2009, 2010 and early 2011, gold mining stocks outpaced the gains in physical gold. One big reason for this is the fact that miners got crushed in the downturn, with GDX losing 63 percent between March 2008 and October 2008. So when the market began its bull run over the last two years, there was a lot of momentum for miners to take advantage of – they had simply been oversold. For instance, AEM didn’t recover to the price peak it set in March 2008 until November 2010.
Have Gold Mining Stocks Lost Their Luster?
The question nagging investors is: Are these miners worth it as a “safe haven” or as a good play on physical gold? Particularly with the wide-scale adoption of exchange-traded funds (ETFs)?
If we take a look during the same six-month stretch as the aforementioned gold mining stocks:
- SPDR Gold Trust (NYSE: GLD) is up 28.4 percent.
- PowerShares DB Gold Fund (NYSE: DBP) is up 27.4 percent.
- iShares Gold Trust (NYSE: IAU) is up 28.5 percent in the last six months.
They’ve done what they’re supposed to do and followed gold as closely as possible.
Overall, what’s happening in the gold mining sector is similar to what we saw in late 2007 and early 2008 with the broader market bottoming out. On top of that, the South African mining companies have been dealing with their annual workers’ strikes.
No doubt, there’ll eventually be a swing back the other way. We’re already seeing the inklings of this on Thursday as gold stalled and miners started off down but eventually made their way toward positive territory.
The performance of gold miners is typically magnified by that of gold… both good and bad. With the massive sell-offs we’ve seen this week, it would be very difficult for me to recommend someone purchase a gold ETF over a gold miner. The upside potential for miners outweighs the gains gold might see.
If you want protection and a direct peg to gold’s price, ETFs aren’t a bad option. If you want to profit, buy the gold mining stocks on the dips.