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What's going on with gold stocks?

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Jan 5, 2011 2:40 pm

I cannot comprehend what's going on with gold stocks?  With the price of gold around $1400 and steadily increasing over the past few years, why have gold stocks not followed this trend?  They have been pretty volatile by my standards.  Stocks like AUY were down in August of 2010 when gold was steadily increasing in value.  Can someone please help me make sense of this?  Was the market sentiment that gold had its run?

Gold was up more than 10% but the stock was only up around 4%.  Shouldn't gold stocks and gold be postively correlated?

Thanks in advance for your thoughts.

Jan 5, 2011 4:11 pm

Brad Zigler, our ETF columnist and commodity expert (he used to work at iShares in research and development of ETFs, offered advice about how to measure gold risk. It's in our January 2011 issue and for more read here.

He also had this to say about owning gold company shares versus ETFs in September. In short, he sums up,

"The takeaway from all this is that mining shares, as a class, is clearly more volatile than bullion. Sometimes, their higher risk yields compensatory rewards and sometimes not. Despite the stellar returns of junior miners in 2010, gold stocks haven’t paid off as well as bullion for portfolio builders." For the entire analysis read

it best to

Jan 5, 2011 6:53 pm

There are times when the stocks lead the commodity, vice versa. I was looking at that a while back, and the performance differential can be pretty meaningful. Looking at some valuations on mining stocks, the valuations are beyond crazy. Like all crazy parties, this one is going to end badly for the sucker left holding the bag.

Compare slv and gld. gld did well in 08/09, slv did poorly. Since last spring, slv has caught up, and seriously outperformed gld.

Jan 5, 2011 7:46 pm

I think there's a big difference between expecting a materials company like AUY to track move for move the spot price of the material they're mining even if it is gold.  That would be like expecting MCD to track the movement of beef, chicken, or potatoes because that's the business they're in.  Obviously there will be some correlation between the price of gold and the profit the mining company is making selling the gold they dig up, but it's not going to be 100%.  For instance, gold might be going through the roof, but all of the mines AUY is currently working have played themselves out.  It's going to take them a little while to switch gears, move their equipment to a new site, and start producing again.  That's going to lead to lower earnings, which will ultimately drive the stock price down.  It's still a stock whose earnings get reported and then the market freaks out if they miss it by $.01.   

You want to track the price of gold more precisely?  Buy something like IAU that tracks the price of the bullion they own or buy some gold and throw it in your safe.