Friday, June 15, 2012

Gold and Gold Miners Are Not Created Equal

One of the questions I hear most often these days is, why are gold stocks not keeping up with the price of gold?  It’s easy to understand investors confusion because for much of gold’s historic bull run gold mining stocks performed in-line-with or even outperformed the hard asset gold.  However, that has not been the case for over a year now.

The gold rush began in the first quarter of 2002 and the move was so dramatic it caught all investor’s attention and thus their investment dollars.  How dramatic was that initial move?  In the first quarter of 2002 the average gold & precious metals equity mutual fund rose 35.52%.  From that point on the demand for anything gold became so high that the SPDR Gold Shares ETF (GLD) was launched in 2004.  The problem is, since the beginning of the gold rush many investors view gold and gold & precious metals mutual funds and etfs as one in the same.  Sadly, many investors are realizing that they are not created equal.

From 2002-2010 the average gold & precious metals equity mutual fund rose 795%.  However, since the beginning of 2011 thru the markets close on June 13th the average performance is a loss of 28.46%.  Pain can also be felt in the Market Vectors Gold Miners ETF (GDX) which is down 23.64% for the same period of time.  Meanwhile, GLD has been able to achieve a gain of 14.18% since the beginning of 2011. 

The good news is that GLD has performed exactly how it should in the market environment we have been experiencing for the last twelve plus months.  The unsettling climate in the equity markets over the last year has pushed investors towards gold for safety, while at the same time reducing the demand for earnings sensitive gold equities.  While many mining companies have been increasing their dividends of late, the average dividend yield for the group is still a far cry from the 2% dividend yield the S&P 500 is offering.

Patience will be needed for those long GDX or any other gold mining investment.  History has shown that investors move from the metal to equities in a bull market.  The greater potential for a long-term return on investment lies with equities that have earnings power.  In the bull market (or rebound off of  depressed lows) which began in March of 2009 the average gold & precious metals mutual fund gained 118% between then and the end of 2010.  GDX gained 86.45% in the same period of time while GLD lagged the miners with a gain of 47.07%.  The problem for mining stocks is that there is much more competition from the overall market where at this point in time a case can be made for equal to or greater than earnings potential. 

A bull market could be right around the corner, a major gold find could be announced or an influential investor could announce an investment in the mining sector, but until then investors need to stop confusing the safety of gold with the gold miners.  Sadly many investors were either sold the miners as a safe haven or made that mistake on their own.  Every investment has downside risk and there has been a lesson to be learned in this environment.  While the gains have not been as robust as in the past, and you should not expect them to be, GLD has been the safe haven that many expect it to be.  Perhaps the mad gold rush of the past created unrealistic expectations for GLD, but since the beginning of 2011 GLD is up 14.18% while the S&P 500 index has a total return of 7.84%.

Thank you and good luck everyone!

Disclosure:  I am long GLD and own the Tocqueville Gold Fund (TGLDX)

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”