Gold miner stocks are the cheapest relative to gold in more than three decades, but bottom fishing might not do you any good.
Barry Ritholtz contends that the relationship between gold prices and miner stocks has gone haywire since the advent of the SPDR Gold Shares exchange-traded fund (GLD) more than one decade ago:
“Gold miners were once a fair proxy for physical bullion. If it were impractical for you as a fund manager to own bars of gold, which entails transportation, storage and security, you had an easy alternative. You bought shares of the miners. The (theoretical) gold reserves they owned was a component of their book value, and was an indirect way to own gold with none of the other costs.
Similarly, if you were an individual investor, and you didn’t want to play the futures markets — high leverage and risk of losses beyond your original investment — you also could buy shares of the various miners.”
Then along came the GLD, the largest ETF that owns physical gold, back in 2004. Its popularity soared right away. More from Ritholtz:
“The ETF killed the primary reason for owning gold miners. Why bother investing in a company saddled with the overhead cost of running a mine and error-prone management — all a drag on returns — when you could instantly buy a stake in gold without any of the complications? …
There may be some price at which the gold miners become attractive. But it seems like it will be impossible to undo the fact that the reason for owning the miners has been displaced by a less expensive, more efficient investment vehicle for gold.
In that case, good luck figuring out at what price the miners are actually cheap.”
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