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Why Gold Mining Shares Are Lagging The Gold Price


Many gold market observers have noted the underperformance of gold mining shares relative to the gold price. Most see the gold exchange traded funds as the culprit due to the fact that they give investors direct exposure to the gold price without the management and other risks that come with owning a mining company.

However, Pollitt & Co’s John Paul Koning disagrees. In his Gold vs. Gold Shares: A divergence? he notes that while “the average price of a gold share has been lagging gold, our view is that the overall market capitalization of the gold industry has been increasing much faster”. If the total dollar value of gold miners has been growing more than the gold price, then the only culprit for lagging share prices is excessive share issuances. Koning argues that the price dynamics between gold and gold shares are different (my emphasis):

“When demand for gold rises, the sole way that demand can be satisfied is through existing ounces of the metal coming to the market, or new ounces mined through sweat and tears. Only a higher gold price can coax these ounces out. But when the demand for gold shares rises, this demand can be met by either existing shares coming to market, or newly-printed shares coming to the market. Thus, unlike gold, higher equity prices are not needed to coax shares onto the market to meet demand, since eager mine promoters are more than willing to meet that demand at existing share prices by creating shares out of thin air.”

MineFund’s Tim Wood came to a similar conclusion in A Precious Metals Wish for 2011. Stop the Darn Transactions!, drawing a scathing comparisons between mining company managers and central bankers who print money out of thin air:

“Yet who cannot be galled to hear precious metal miners cooing and tut-tutting about profligate central bankers and leveraged sovereigns even as they issue stock at rates to make even Ben Bernanke blush, make high risk bets on the far distant future, and spend more on fees and commissions than dividends.”

The take away from the two analyst above is to look at a miner’s share issuance history before investing, as not all miners are profligate with their paper.

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