How gold miners became a bad investment

By Nathan Vardi

Super Pit gold mine at Kalgoorlie in Western Australia is Australia’s largest open-pit mine.

It’s tough to find an entire investment sector that has tumbled by 50% this year, but that’s how far the shares of gold mining companies have fallen in 2013. The price of gold, of course, has also plunged in 2013 by some 25% to $1,240 an ounce. But gold mining stocks have performed much worse than broader market indices and even gold itself.

For nearly eight years now, shares of gold producers have underperformed in a very bad way, which is remarkable because until recently these companies were operating in the most favorable gold price environment imaginable. This year will probably be the first time since 2000 that gold will have a negative annual return. Gold mining companies, however, have managed to underperform gold in both good gold markets and bad — with the underperformance getting exceptionally ugly in the down times.

Gold miners have given investors little upside when the price of gold rises and handed them serious losses when gold falls. Gold producers have consecutively underperformed gold since 2006, Deutsche Bank DB +0.07% notes in a recent metals and mining report. They only outperformed gold in four instances in the last 12 years as gold soared starting in 2000 from a decade of lows to a high of $1,900 an ounce in 2011. For gold miners, all the overperforming years came prior to 2006.

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