Are Gold ETFs to Blame for Miner Underperformance?

September 13th at 9:10am by John Spence

Claims that gold miner stocks are lagging bullion prices due to the popularity of gold ETFs as an alternative are overblown, mining executives say.

ETFs that hold physical bullion or invest in gold futures have grown rapidly in recent years and let investors get exposure to the yellow metal with one trade and low fees.

“That, some analysts say, limited demand for mining shares, formerly the simplest way for investors to gain exposure to gold without paying to store it,” Dow Jones Newswires reports.

SPDR Gold Shares (NYSEArca: GLD), the largest gold ETF, holds $72 billion in assets and is backed by 1,289 metric tons of bullion.

Raising dividends is seen as one way miners could better compete with gold ETFs.

“ETFs are a major competing alternative for investment,” Kirkland Lake Gold CEO Brian Hinchcliffe said in a report earlier this year. [Gold Miner ETFs Eye Dividends]

Many investors are opting to hold gold directly with ETFs rather than owning mining stocks, which are impacted by labor disputes, operating costs and other factors. [Platinum ETFs Jump After Mine Strike Turns Deadly]

GLD, the bullion ETF, has a three-year annualized return of 19.4%, compared with 3.2% for Market Vectors Gold Miners ETF (NYSEArca: GDX).

Yet some mining executives say there is more to the story of why their share prices have lagged gold prices, according to the Dow Jones Newswires story.

“Mining costs surged, with some companies reporting massive cost overruns. Others made mistimed or overly expensive offers to buy competitors,” according to the report.

“I think the benefit that the ETF has had on the gold price outweighs the detriment it’s had in taking away investment dollars from the stocks,” said Charles Jeannes, chief executive of Goldcorp.

“Prior to the ETF, the gold[-mining] businesses didn’t have to be great businesses,” said Sean Boyd, chief executive of Agnico-Eagle Mines, in the article. “The shares would go up when gold went up. Now, that cover has been blown. Investors have options.” [The Outlook for Gold Miner ETFs]

Market Vectors Gold Miners ETF

Full disclosure: Tom Lydon’s clients own GLD and GDXJ.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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