Gold Miners Are Heating Up And Could Start Outperforming Gold

Includes: ABX, AEM, AU, AUY, GG, GLD, KGC, NEM
by: Zvi Bar

Through 2011, and during the prior two years, gold dramatically outperformed the large miners. Gold bottomed out in October of 2008, and has since more than doubled. Since that time, the gold miners have considerably underperformed gold.

Much of the more recent gold outperformance was based upon a broad expectation that the price of gold would not sustain its momentum and price range. There was even a point, though, during the third quarter of 2010 where gold began to depreciate while the miners began to appreciate. This appeared to indicate that the market was searching for a new bottom for gold, and that the miners were being re-valued assuming such a bottom.

Towards the end of the fourth quarter of 2010, though, the gold miners began to depreciate and again distance themselves from gold. Nonetheless, within 2012, both gold and the gold miners have both began to move upwards together. Below are seven large-cap gold miners that are traded in the United States: Barrick Gold (NYSE:ABX), Goldcrop. (NYSE:GG), Newmont (NYSE:NEM), Kinross (NYSE:KGC), AngloGold Ashanti (NYSE:AU), Yamana Gold (NYSE:AUY) and Agnico-Eagle Mines (NYSE:AEM). I have provided their present yields, as well as their 1-week, 1-month, 6-month and 1-year performance rates. I have also provided the performance rates for the gold via the Gold ETF (NYSEARCA:GLD).

These companies suffer risks that a pure commodity will not, such as political risks, mine productivity, distribution costs, management negligence and fraud. Recent miner performance has varied dramatically from company to company, with gold consistently beating the majority, though not this week. Over the last year, KGS and AEM significantly underperformed their peers, while AUY is the only listed miner to outperform gold.

Over the last week, KGC appreciated considerably, rising over 12 percent and outperforming all other listed miners and gold. Further, all of these miners have begun to move upwards, along with gold, and it appears probably that the miners will continue to be more highly correlated to gold over the coming months. AEM is now below half its 52-week high, and KGC is still about 30% below its 52-week high, with the Gold Miners ETF (NYSEARCA:GDX) down 19% from its 52-week high. This all compares to gold now being about 14% below its 52-week high.

Additionally, these large miners do provide a dividend, while gold does not and also often requires a storage cost that is akin to a management fee. If rising gold prices continue, then the miners should eventually follow that rise and undergo an upside correction. Given the significant prior disconnect between gold prices and gold miner valuations, it is possible that these miners may eventually start to increase in share price even if gold merely stabilizes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.