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Gold ETFs: Miners vs. Bullion

tlydon@globaltrend.com (Tom Lydon)

Gold miner ETFs continue to drastically underperform bullion prices. Gold producer stocks are posting their weakest relative performance to bullion in over three years.

Market Vectors Gold Miners (NYSEArca: GDX - News) was down 9.3% year to date as of April 16, while SPDR Gold Shares (NYSEArca: GLD - News) gained 5.6%, according to Morningstar.

The relationship between gold miners and bullion “has gotten to an extreme enough level that I believe something major will occur over the next few months,” says Robert Sinn at the Stock Sage blog.

He sees two likely outcomes. “Gold could fall substantially (over $100/ounce) which would make the current valuations of the miners more reasonable on a relative basis,” or gold miners will rally and “revert to the mean.” [Capitulation Time for Gold Miner ETFs?]

Russ Koesterich, global chief investment strategist at iShares, says investors need to understand that gold and gold miners are distinct asset classes that can behave very differently.

“It’s important to keep in mind that despite gold’s expense and the current cheap valuations of gold mining company stocks, gold miners are not a good substitute for physical gold from an asset allocation perspective,” he wrote at the iShares blog.

“First, while it’s true that miners and gold tend to be highly correlated, these are different asset classes. As a commodity, gold is diversifying to a portfolio. Second, over the long term, gold has been a much better inflation hedge,” Koesterich added. “Third, while many investors believe that miners are due for a spell of outperformance given their recent under performance versus the metal, miners have actually been trailing gold since 2003. Finally, real rates have historically had little to no impact on equity returns.”

The chart below is the ratio of the gold miner fund versus the gold bullion ETF. When the ratio is falling, it means miners are underperforming gold prices.

Full disclosure: Tom Lydon’s clients own GLD.