Gold Miners To Outperform Gold

By Klaudius Sobczy, founder of Advanced Dynamic Asset Management.

It was quite surprising how well the gold view worked over the last weeks. Obviously, it was greatly supported by the major financial powers of this world. Firstly Mr. Draghi with the announcement of the “unlimited” purchase of government bonds in the Euro-Zone followed by Mr. Bernanke who announced a further disguised QE3 which focuses on the purchase of MBS to the tune of 40 billion US-Dollar.

Physical gold did make the move and begins to tackle the former resistance levels around 1800 followed by 1900. The whole focus continues on gold as investors are assessing the real impact of the money printing on both sides of the Atlantic. However, there are more forgotten sides to the gold trade which are not in the limelight of the investors.

The following chart shows the relative performance of the gold mining stocks relative to physical gold price. Over the last 12 months the gold miners’ underperformed gold quite substantially.

HUI gold mining index relative to gold price in USD

Source: Bloomberg

Gold miners are generally impacted by three major issues: the general development of the equity prices, gold price and energy prices. Clearly energy prices and equity prices were impacting the gold miners negatively. As investors shun risk so they shun gold stocks. Higher energy prices impact directly production costs thus the margins were expected to contract. During the last 12 months the gold price stagnated as it appears to have built a base. At the same time energy prices increased making the case for gold mines unattractive.

Now the world changed for a moment. Energy prices stagnate at a high level thus the margin deterioration may slow down or even stop. Gold prices increased and may increase further thus impacting margins in the future positively. Finally, demand for equities improved and the global equities staged an impressive revival. Three out of three ain’t bad.

The relative trade gold mines versus gold may just begin. The under owned and undervalued gold miners have a long way to go in order to catch up with an average valuation compared to gold. Thus a value orientated investor may consider swapping gold investment for the leveraged gold miner.