Its no secret that 2011 has been a lackluster year for gold mining stocks. While gold (as measured by the GLD) has soared 24% over the last year, gold mining stocks have not fared nearly so well.
As a shareholder in several mining companies, and having tracked about 60 US-listed gold miners, I was keenly aware of the underperformance, but I was still taken aback recently by taking a broader look at the damage. Not only have gold miners underperformed the price of gold, but they've had a terrible year even when compared to the overall stock market.
Taking a broad look, while GLD has returned 24% for the year, GDX has returned -4.3%, dramatically lagging gold and even lagging the beleaguered S&P 500 by roughly 5%. The GDXJ, an index of more speculative junior miners, has performed pathetically, chalking up a return of -27% for the year. Far from providing leverage to the gold price, gold miners have blown a hole in most investors portfolios this year.
The underperformance has been even more dramatic when you consider that of all listed US gold miners (some 60 stocks), only 4 have outperformed the price of gold: Yamana Gold (AUY), Royal Gold (RGLD), Vista Gold (VGZ), and Extorre Gold (XG).
With a sample size of 4, its difficult to ascertain any common characteristics that might be indicative of outperformance. Yamana's defining characteristic is that it has negative cash costs for production, while Royal Gold's royalty strategy means that it essentially takes no mining risk and isn't affected by the sharp rise in the cost of mining that has afflicted most miners over the past 18 months. Vista and Extorre are less clearly different, both being junior miners that are not yet at the production phase.
The most obvious conclusion is that the outperformance of gold is linked to the money flow into the commodities sector more generally, while gold stocks have been affected by the more bearish money flows into stocks. In addition, rising cost of production has been a theme throughout earnings reports for gold miners, meaning that the miners have failed to deliver on the promise of leverage to rising gold prices.
Margins have by and large been disappointing at most gold miners, and we have yet to see a definitive sign that prices have stabilized. Overall, the failure of gold miners to outperform gold has been a painful lesson to those using them as a proxy for gold, and it has been a useful reminder that asset class matters. As the old adage goes, don't using a micro vehicle to place a macro bet.