Gold miners have not been leveraging the rise in the price of the gold since the summer of 2011. This fact has been acknowledged by investors, writers and pundits. In wrestling with this concept, I decided to pursue this line of thought further with some backwards analysis of historical chart prices.
I used the HUI index of the 15 largest gold miners that do not largely hedge their gold outputs for comparison, since even if it is not tradable, it has a history that is chartable. The HUI is a dollar weighted index, with rebalancing performed infrequently every quarter. The miner components of this index are listed as following:
HUI Gold Bugs Index
This list is complete and up-to-date as of January 12, 2012.
|Company name||Symbol||Weighting[nb 1]|
|Goldcorp Inc||NYSE: GG||16.20%|
|Barrick Gold||NYSE: ABX||15.37%|
|Newmont Mining||NYSE: NEM||10.88%|
|Harmony Gold Mining Adr||NYSE: HMY||5.21%|
|Coeur d'alene Mines||NYSE: CDE||5.11%|
|Yamana Gold||NYSE: AUY||5.00%|
|Anglogold Ashanti Ltd Ads||NYSE: AU||4.88%|
|Gold Fields Ltd Adr||NYSE: GFI||4.80%|
|Randgold Resources Ads||NASDAQ: GOLD||4.71%|
|Eldorado Gold Corp||NYSE: EGO||4.34%|
|Hecla Mining||NYSE: HL||4.14%|
|Comp de Minas Buenaventura Ads||NYSE: BVN||4.08%|
|New Gold Inc||AMEX: NGD||3.90%|
|Kinross Gold||NYSE: KGC||3.85%|
|Agnico Eagle Mines||NYSE: AEM||3.11%|
The Market Vectors Gold Miners ETF (GDX), would provide a larger 32-company sample of the gold mining industry, but the fund has only existed for about six years. The following are charts of the HUI versus the gold prices for various time frames.
HUI Large Cap Gold Miners versus Gold for Ten Years
Click to enlarge
Most pundits will interpret this chart for you showing the great climb in gold prices since the depths of the gold bottom in 2000. Given this long time frame of over a decade, the spectacular rises in gold miners in the HUI index of large gold miners is breathtaking and undeniable. Gold prices increased by 600%, while the miners increased about 1200%, giving the miners a leverage of about 2:1 to gold prices. It is this leverage that spawns the gold investing doctrine of "Gold miners provide leverage to the underlying gold price".
However, we are investing in the here-and-now, in February 2012, and previous history and performances may provide some guidance as to where stock prices should go from here.
It may be instructive to check the comparison of miners versus the gold price over a shorter time frame, such as since the crash of 2008. The chart of such a comparison follows:
HUI Large Cap Gold Index to Gold Since 2008 Crash
Yes, again there was significant leverage of mining company stocks to gold prices. Over this time span, the price of gold increased 130%, while gold miners' stock prices increased about 210%. However, there was a cooling off in the year 2011, as prices of the miners tended to chop up and down, as gold prices marched further higher.
The following chart shortens the time frames again for comparison to the summer of 2010, when the US Federal Reserve announced steps to pump money into the economy to preserve a fragile recovery. The markets, reassured by this move, promptly entered rally mode and gold prices continued higher.
HUI Large Cap Gold Index to Gold Since August 2010
Now the comparison becomes very telling. Gold miners' stock prices rose only 15%, while the price of gold increased by 45%.
Shortening the time frame once more to the January 2011 dip in the gold prices will give us the annual performance statistic. The chart follows:
HUI Large Cap Gold Index to Gold Since January 2011
Here, the performance comparison is stark indeed. Gold prices advanced about 30% for the year, while gold miners' stock prices, for all intent and purposes, went nowhere!
The gold miners' run is done! There may be many obvious, and not so obvious reasons, for this recent underperformance, but the charts are quite clear. Gold miners' stock prices have languished, while gold prices are appreciating.
There may be other interpretations of the lack of leverage, but the unvarnished conclusion is that gold miners are struggling. One interpretation is that this is an opportunity for picking up gold miners on the cheap, but I have another opinion. I have posted opinions about the future declines in gold prices here and selectively investing in gold stocks here.
The investor should take the above inferences into consideration in their stock positioning for the future.
Important Disclaimer: The information and opinions contained within this document reflect the personal views of the author and should be viewed as food for thought and amusement only. The author may from time to time have a position in any of the securities mentioned. There are no guarantees of the accuracy, reliability or completeness of the information contained herein. Independent due diligence and discussions with one's own investment and business advisor is strongly recommended. These writings are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not request or receive compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.
Additional disclosure: Equities mentioned – GDX ETF, HUI index, gold, GG, ABX, NEM, HMY, CDE, AUY, AU, GFI, GOLD, IAG, EGO, HL, BVN, NGD, KGC, AEM