An investor wishing to get a strategic exposure to the gold price has traditionally had two options: direct purchase of the commodity or invest in gold mining equities. Relative performance of gold mining stocks versus the gold price has varied widely over time, though historically they have tended to have a strong correlation to each other.
Rising margins, coupled with stable demand allowed gold miners to trade at a substantial premium to many other equity sectors - including the broader mining sector – for many years.
However, substantial under-performance in recent years has meant that the gold mining sector’s premium has completely evaporated and gold mining companies are now trading at a discount when compared to mining companies generally.
Over the past two years, gold miners’ share prices have also substantially underperformed gold. While there is normally a strong relationship between the two, the economic factors that have driven the gold price upwards, such as the debt crisis in Europe, banking problems and currency debasement fears, have not been positive for gold mining shares.
This partly explains the reason for the divergence between the performance of the gold mining companies and their main revenue source.
In addition, while the business fundamentals of these mining companies might appear sat first glance to be strong, a closer inspection of exploration and capital expenditures reveals a different picture. A lack of new discoveries, coupled with deteriorating brown-fields projects, have left mining companies with production and cost gaps that have undermined their performance.
But there are signs that this picture could change.
Mining companies are increasingly addressing these issues. Many are now undertaking measures to reverse this trend: including changes at management level, cutting costs to boost margins, and increasing dividends.
Historically gold miners have tended to outperform gold during periods of rising global business activity, where they can benefit from the stronger performance of equities generally.
With growth in the US and China picking up again, there may be scope for miners to begin to claw back some of their performance gap to gold.,
Tana Goldfields United Kingdom - Expert view: gold mining