Gold Miner ETFs Outpacing Gold: Here's Why

by: Tom Lydon

Gold miner ETFs have been outperforming gold ETFs for the last month. Gold certainly hasn’t been a slouch this year, at least managing to grip tight to its current price levels. But why are gold miners leaving them in the dust?

Market Vectors Gold Miners (NYSEARCA:GDX) is up 4.9% in the last month, compared to SPDR Gold Shares (NYSEARCA:GLD), which is up 2.4% in the same time frame. Market Vectors Junior Gold Miners (NYSEARCA:GDXJ) has done even better, up 9.3% in the last month. What gives?

One big reason may be that gold miners are simply enjoying improved profit margins. Although the price of gold has inched up or gone sideways this year, gold miners are benefiting from the elevated prices.

Of course, that has its limits.

Many investors are under the impression that gold miner shares are going to yield two to three times the leverage that gold stocks do. Alix Steel for The Street reports that just because gold prices go up, it doesn’t mean small amounts of additional revenue drops to the bottom line.

According to Adam Graf for Dahlman Rose & Co. a lot of companies and a lot of projects have royalties, gross revenue royalties or net revenue royalties on some of their gold flows. If your gold price goes up, so do those cost elements. And so a lot of these companies are sensitive to currencies and diesel price. This is important to consider when speculating on a gold investment.

As of Wednesday, gold prices were at $1,150 an ounce as investors bought the precious metal. The news that the Federal Reserve would keep interest rates lower caused this gold speculation.

Steel also reports that gold prices were fighting a stronger U.S. dollar and finding support from traders after the Bank of Japan held key interest rates at 0.1%. Also, reassurance from the Federal Reserve that it’s more concerned with economic conditions than with raising rates also renewed the interest in gold.

  • Market Vectors Junior Gold Miners (GDXJ)

  • Market Vectors Gold Miners (GDX)

Disclosure: None