Why aren’t the Gold miners increasing when gold rises?

I’ve been holding GLD for quite a while now – some since feb 2010 with more added later that year and again in late 2011 – but I haven’t yet been investing in the miners.  I more or less thought of it as an up-and-coming safe haven currency when the current financial crisis works through with active central banks in multiple countries – particularly the depression thats still unfolding in Europe and has no easy solution.  As this continues, especially with open-ended buying commitments from the fed, I’ve been thinking about whether to consider adding gold miners instead of yet more GLD to increase my gold exposure.

I put together a chart of the past performance of the GLD (a great track for gold prices because it literally is holdings of physical gold) vs 6 other gold plays:

RGLD, which seems to move like a leveraged GLD fund, is a company that acquires Gold mining royalty trusts – so it is more of a hedge fund than a company.

GGN is an ETF with holdings in a bunch of companies, primarily gold, with yield ballpark 10% yield.  I don’t really trust it given that it’s gone down 20% as gold’s gone up 30%, but I’m a bit biased because I generally prefer pure plays to ETF’s.

GFI, EGO, ABX & GG are all actual miners.  Of course they all have operations in multiple countries as well as some mines other than gold.

GFI is a South African miner with about a 3% yield (they try to pay 25% of earnings or so into dividends).  They are probably down a bit due to the strikes in South Africa that have been devastating enough to significantly reduce the value of the South African Rand.  They have operations elsewhere in africa, australia, etc.

GG is based in Vancouver with holdings of mines primarily in Canada, Mexico & the US (some in Argentina).  Current yield 1.2%

EGO is based in Brazil with mines in Brazil, China, Greece and Turkey.  Yield about 0.8%.

ABX is worldwide and has interests in copper, oil & gas as well as gold.  Yield about 2%.

I’m not going to make recommendations here whether or not to buy any of these … I’m really aiming to start a discussion on the following:

1. Why do the 4 gold miner’s share prices go down 20% (except GG at 0%) while GLD has risen 30%?  Does that mean we can’t expect them to rise just because gold goes up in price in the future?

2. Do you think investing in some gold miner stocks are a good idea – do you see it as a plus that they haven’t risen with gold?

Could it be fear of investing in foreign countries with the European crisis, slowdown in China, and the lackluster US jobs report (despite the great headline number)?  This fear is justified in tough economic times as protectionist sentiment is on the rise (like between China and Japan) as well as political turmoil (strikes in China, South Africa, recent revolutions in the middle east with an ongoing one in Syria, etc.)

3. What do you think the best thing to look for in a gold miner is?  Valuation perhaps (P/E), location of mines, good management (may be tough to rate).  I don’t necessarily think yield is critical, but I like the commitment to a percentage of profits in yield that GFI has…

Let me know what you think!


About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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