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A return to the gold rush for miners
by James Phillipps on Jun 28, 2012 at 10:26
Gold mining shares, traditionally held as a geared play on the precious metal, have been serial underperformers over the past 18 months, but there are tentative signs that the tide is starting to turn.
While physical gold has delivered positive returns, albeit with considerable volatility over the past 12 months, up 6.21%, gold miners have lagged markedly. The producers are down -11.06% over the same period and have been trading at two standard deviations below the historical average price differential between gold equities and the underlying gold spot price for much of the last year.
But in a stark turnaround, the FTSE Gold Mines index (see below) has rebounded by 16.27% over the 30 days to 15 June, while the price of physical gold is up by a far more modest 3.96%.
‘There is no denying the performance of gold equities has been disappointing, to say the least, relative to physical gold prices over the past few years,’ says Neil Gregson, lead manager of the JPM Global Natural Resources fund.
‘The performance divergence has been particularly prominent since the beginning of 2011 and this trend seems to be continuing in 2012.’
Looking back at the historical relationship between gold equities and the gold spot price, he says the latter started to trade on a premium in the 1980s due to improvements in gold processing technology.
This resulted in substantial growth in Australian and North American gold production, which resulted in considerable investor interest and the opening of dedicated gold funds. This theme continued throughout the 1990s, with gold shares trading at two to three times the value metrics of other mining companies.
At the same time, though, many gold companies started to hedge proportions of their gold production, which resulted in heavy losses from 2001 onwards as gold set off on its decade long bull run, which turned off investors.
‘Along with stalling production growth and sharply increasing production costs, it was no surprise that gold ETFs, often backed by gold bullion, seemed like a smarter alternative than gold equities to many investors,’ he said.
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