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Gold Miners Continue to Fail

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With gold's price drop of 25% in less than two years, gold miners, which offer an equity spin on investing in gold, have not panned out.

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The demise of gold in the last few months has been well documented as investors watched the metal tumble from $1,900/oz to below $1,400/oz in less than two years, a drop of 25%. But it was not that long ago that analysts and investors were not only touting gold as a good investment, but gold miners were seen as a great opportunity for those looking for an equity spin on the metal. Unfortunately, that idea has not panned out, as the past few years have hit the gold mining sector especially hard.

Gold Miners Lag Behind

For the past few years, the performance of gold miners has been drastically lower than that of the metal itself. Taking a look at the performance deltas between the SPDR Gold Trust (NYSEARCA:GLD) and one of the largest gold mining funds, Market Vectors TR Gold Miners (NYSEARCA:GDX), reveals a clear trend. In the last year alone, GLD has lost over 15%, while GDX is down nearly 40%. Stretch that timeline out five years, and we see GLD with gains of more than 40%, and losses of 45% for GDX.

What is perhaps most curious is that GDX has still been able to rake in assets, growing more than $1.5 billion in 2012, a year when the fund was down nearly 9%. This would suggest that some investors have yet to lose faith in the floundering asset class, despite a pitiful performance as of late.

Why Gold Miners Are Underperforming

There are a number of factors that are combining to hurt gold miners. For starters, the weakness in gold prices has certainly been an issue. Gold miners typically come handcuffed to high betas, meaning that they will often underperform gold on negative days and vice versa.

Investor confidence has been another problem. While it seems that a number of retail investors are comfortable with adding mining exposure (as noted above), a number of institutions are not very pleased with how miners have been reporting costs and profits. "The managements and the boards of the gold companies really have no one to blame but themselves for some of the negative sentiment and disappointment" said Joseph Wickwire of Fidelity Investments.

Though many of the world's largest miners have pledged to clean up their act and add more transparency, it may take some time before confidence can be restored in what appears to be a number of poorly-run firms. With gold enduring a rough bear period, it will be especially important to monitor miners and producers to see how their administrative changes will impact returns and investor confidence in the coming years.

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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
No positions in stocks mentioned.
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