“Historically, gold miners have been poor capital allocators. Since the 1990s they have kept dividend payout ratios low, reinvested in marginal projects, and issued new equity to finance acquisitions. The resulting dilution has created a significant drag on returns,” Bryan wrote.
“Compounding these structural challenges, gold miners currently face a tough operating environment,” he added. “Despite these risks, gold miners now look attractively priced relative to gold bullion, after years of underperforming.”
“Gold has advanced for 12 successive years, driven at least in part by demand from investors looking for a store of wealth amid concern about inflation,” Bloomberg reports. “Despite benefiting from that rally, gold producers’ margins have come under pressure from rising prices for labor, equipment and raw materials.”
The chart below shows the relative performance of GDX against GLD.
Full disclosure: Tom Lydon’s clients own GLD.