Jun 272014
 

In a neat and orderly world, gold-mining stocks are supposed to fare better than the metal itself. And for once, that’s exactly what has happened.

AP DROUGHT GOLD PROSPECTORS A USA CA

(Genevieve Ross, The Sacramento Bee, via AP)

Funds that invest in gold-mining stocks have soared 25.1% this year, vs. 9.2% for funds that invest directly in the precious metal. And that makes sense. Consider a company that gets gold out of the ground for $1,000 an ounce. If gold sells for $1,200 an ounce, the company’s gross profit is $200.

Now consider what happens if gold rises to $1,300 an ounce — an 8.3% gain. But the gold-mining company’s profit rises to $300 from $200 — a 50% gain.

For the five years ended 2013, funds that invest in gold and other precious metals gained 43%, according to Lipper, which tracks the funds. Gold-mining funds slumped 18%.

Part of the reason gold-mining stocks lagged is human nature, both on the part of the companies and on investors. When gold prices are rising, gold miners like to open new mines, which is an expensive proposition: You have to buy property, get regulatory permission and build the mine. And when gold prices rise, mining companies often buy dubious new properties.

And investors won’t buy gold (free)-mining stocks unless they’re feeling positive that gold will continue to soar. Apparently, investors are voting with their feet — and jumping into the mines.

gold, inflation, mining, Funds, Markets, Pro Talk 

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