Gold versus gold miners
Gold stocks have underperformed most of the broad market indices and gold itself. Gold prices, as tracked by the SPDR Gold Trust (GLD), have significantly outperformed the VanEck Vectors Gold Miners Index (GDX) since 2008.
Since the start of 2015, GLD has fallen by 7% while GDX has fallen by 31%. The major gold companies also fell. Yamana Gold (AUY), Barrick Gold (ABX), Newmont Mining (NEM), Goldcorp (GG), and Kinross Gold (KGC) fell by 60%, 43%, 19%, 33%, and 47%, respectively.
Gold prices have been on a roller coaster ride since the beginning of the year. Uncertainty in the form of the Greek debt crisis and Chinese market slowdown was positive for gold prices. Positive US economic data, the strengthening US dollar, and the eventual Fed liftoff in the interest rates were negative for gold prices, so far.
Gold stocks are a levered play on gold
One of the most dominant reasons for the divergence between gold miners and gold is gold miners’ operating leverages. Gold miners’ profits fall faster and rise higher than gold prices because gold miners have fixed costs. The cost to mine gold is usually similar under various gold price levels. As a result, when gold prices rise, gold miners have the potential to provide much higher returns. The operating leverage works the other way.
What we’ll cover in this series
In this series, we’ll look at various factors that are impacting gold miners like Barrick Gold, Newmont Mining, Goldcorp, Yamana Gold, and Kinross Gold. Goldcorp forms the largest share of GDX’s holdings at 7.20%.
We’ll discuss factors like the cost profile, cost reduction progression among miners, reserves profile, and debt standing. Finally, we’ll see how it boils down to stock performance under the current gold price environment. We’ll see which stocks are more levered to gold prices.