For the last couple of years, we've heard promises from gold mining analysts that gold mining stocks would explode in price, leaving the price of gold behind in the dirt, no pun intended.
Unfortunately, this just hasn't happened. It just hasn't. And it's one reason - of many - why I don't own a single share in a gold mining company. All of my "gold" money is just in gold bullion, and will stay in gold bullion.
Today, Gold Investing News published an article with the headline "Gold Miners Disappoint in Q2." Gold prices have fallen less than gold miners over the last quarter, two quarters, and even the last year.
Note that over the last year, GLD, which exists primarily to track the performance of gold prices, is about where it was exactly a year ago. HUI, the AMEX Gold Bugs Index is down about 25%. GDX is down almost as much. Barrick Gold (ABX), Goldcorp (GG), and Newmont Mining (NEM) are keeping up with the overall index in how much they've lost.
More specifically, here are the results for the last 12 months:
GDX is down 25.88%.
ABX is down 31.97%.
GG is down 25.46%.
NEM is down 19.27%.
That's not good for the people who just a year ago were promising it would be increasing and making its investors rich.
But why have gold miners underperformed? Most likely for the reasons listed below. Gold miners aren't where many investors want to be if something catostrphic really does happen, and a price drop in gold would likely be priced in the stocks rather than the bullion itself.
In other words, a drop in the future is priced into gold stocks, and fears of actual need for the physical stuff alone is priced into gold. Mix the two together and you'll see physical gold up slightly while gold miners are down substantially.
When The Big One Happens, Will Miners Explode?
One typical line of thought is that gold miners will be the place you'll want to be if some sort of economic collapse or monetary collapse happens. This is probably true, if the collapse is somehow contained and the rule of law doesn't disappear.
But if things actually get completely out of hand, I'd much rather have the actually physical bullion in hand than a paper giving me claim to some fiat profits of a gold mining company.
What If a Strong Correction Is Priced In?
The price of gold is fundamentally different than the price of gold mining companies. The idea of a gold mining company is that the price is a question of corporate profits relative to other income sources that are riskier or less risky.
For the gold, the price is just whatever you can get in the market, and there's less of a question of accounting fundamentals. It's impossible to know what the "real" value of gold is other than spot price; for stocks, it's a little different.
For example, if I thought gold prices were going to go up by 25% and then crash, I would see gold bullion and ETFs as a better investment than miners. If, however, I thought gold prices were going to go up by 25% and then level off or crash, I wouldn't necessarily think that would translate to a 25% increase in value for those gold stocks, especially not if I was a long term investor. I'd price in the drop for the stocks before the bullion, because as long as the gold price is higher, well, gold bullion can be sold higher - for gold stocks, it's all about production and sales over time, which means a drop in the future should be seen as a drop in the evaluation now.
Either way, who knows. Gold miners could still take off from now, but not unless gold begins to take off again and shows some strong signs of starting up another bull market trend, and that's just not going on right now.
This is a great reason why I don't own any gold miners, and keep my gold speculation strictly to the metal stuff. There are far too many variables to consider for most investors when it comes to picking miners, and buying gold itself is simpler and still gets the job done.
Additional disclosure: I own physical gold and silver, and will be buying more regularly.