By Samuel Lee
Morningstar
Gold miners have been an embarrassment. A dollar put in gold five years ago would be worth about a $1.70 today; that same dollar in Market Vectors Gold Miners ETF (GDX) would be worth only $0.80. What explains this sorry performance? In theory, gold miners are supposed to have operational leverage, because their up-front fixed costs are much higher than their ongoing costs. It takes a colossal level of incompetence to have negative operational leverage when the price of your goods sold rises 70%.
The popular story is that physically backed exchange-traded funds like SPDR Gold Shares (GLD) came along and soaked up investing dollars that otherwise would have gone to miners, depressing their valuations. While there’s some merit to the story, it doesn’t explain gold miners’ continued weakness (markets are forward-looking). It also seems to imply a ludicrously high premium on the convenience of owning gold via an exchange — gold certificates, futures, and even physical storage were feasible options before gold ETFs came along. Finally, it doesn’t explain the abject failure of gold miners to provide leverage to gold prices before the gold ETF era.