Gold ETF (GLD) Outshines Gold Mining ETF (GDX)

Is there nothing an investor can count on?

A long-held gold investing maxim appears to be breaking down.

It used to be that you could count on gold-mining stocks to do twice as well as gold itself when the price of the metal was rising.

That’s what the WSJ (subscription required) reported in “Oil Prices Take a Bite Out of Gold Stocks.” Let’s look at some more highlights:

The reason: Mining-company profits went up disproportionately when the gold price rose.

That leverage made gold stocks an attractive bet for investors wanting to benefit from a bull market in the metal.

But so far this year that strategy hasn’t worked.

Since Jan. 1, gold-mining stocks have lagged behind the gains made by physical gold.

The Amex Gold Miners Index, which tracks a basket of large precious-metals mining stocks, is up less than 1% while gold itself is up close to 8%.

Why the reversal?

The cost of extracting gold is rising faster than the gold price itself, says Evan Smith, co-manager of the $1.1 billion U.S. Global Investors Global Resources Fund (PSPFX).

Specifically, the cost of the diesel fuel necessary to run the big mining machinery is spiking. It’s up a staggering 27% since the beginning of the year.

That has crimped profit margins and has made the metal itself more attractive to investors.

Owning only the metal rather than a mining stock eliminates all the risks associated with running a mine and retains the safe-haven benefits of gold. (Gold prices tend to rise during periods of financial and geopolitical uncertainty.)

…

“The gold exchange-traded fund is reducing the attractiveness of gold stocks and has been a drag [on mining stocks]” says Leo Larkin, an analyst at Standard & Poor’s Equity Research in New York.

More precisely he means the SPDR Gold Shares ETF (GLD), which holds more than 1,200 tons of solid gold bullion. Since its introduction in 2004, the ETF greatly simplified the buying and selling of gold for most investors.

The above 6-month chart, (courtesy of YahooFinance), comparing GLD with GDX shows that these have been tracking each other fairly closely with GLD currently being in the lead.

However, the difference becomes more apparent when looking at the YTD returns, where GLD is clearly leading with +9.83% vs. GDX’s +1.2%. Just as important is the volatility.

Over the past year, GLD has come off its high by -8.04%, which means it never reached its 10% trailing stop loss point. Compare that to GDX, which has fluctuated as much -16.74%.

While gold mining ETFs may have had an edge over the metal itself in the past, for this period GLD has come out ahead as the clear winner.

Disclosure: Holdings in GLD