Why has Gold Outperformed Gold Companies Lately?
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Barrick Gold Corp (NYSE: ABX) is the largest gold mining company in the world, with its headquarters in Toronto, Ontario. It has not fared well since its plateau toward the end of January and through February when it topped off in the high 40’s, close to 50. Since then it has regressed to about 38.77 at the writing of this article. As rumors of an impending down turn continue to plague the market one might ask themselves: As a point of stability and a safe haven, should I invest in Gold or Gold ETF’s or can I invest in Gold mining companies for the same purpose?
Recently Barrick replaced its chief executive and installed a former U.S. investment banker as co-chairman of its board of directors by the name of Jamie Sokalsky, saying they will help the company restore its lackluster stock price. Obviously the powers that be have been disappointed lately with the way share prices have been moving. But I am not totally sure a whole lot could be done about the direction of the stock. By making limited observations I would like to point out why gold companies in general have under performed gold itself.
This discrepancy can be seen if we look at a chart with both ABX and the SPDR Gold Shares ETF (NYSEMKT: GLD) side by side. We are going to use the GLD as a quick reference to gold prices since it follows accurately and closely. If we look at the chart, we can see that GLD is up about 4.94% year to date while ABX is down 9.91% year to date. It clearly shows how gold outperforms the gold companies.
There is a very good reason for this. Gold stocks are first stocks and are traded thereof. Investors treat gold stocks first like stocks and then possibly as a proxy for physical gold. Gold is seen as a safe haven for investors. As the reasoning goes—gold is looked at as a steady reliable place to find value in a global environment where governments are attempting to jump start stagnant economies by printing paper money.
There are other factors that gold companies must tend to that gold does not have to deal with.
The Cost of Mining Increases
This is a real boondoggle for gold companies. While gold prices may drop, there is no cost factor involved with the price of the metal. But when mining costs go up, it eats into the profits of every gold company even when gold prices are falling. So it becomes a little more understandable why gold companies would not perform as well as the metal sometimes.
As we have watched the cost of gold drop, we have also seen the cost of mining increase. While gold mining was up 25%, copper mining costs were up a startling 66%. For Barrick, copper sales and production was up but because of the difference in margins, Barrick did not benefit that much. Even Newmont Mining Corp (NYSE: NEM) a rival of ABX, is getting ready for a rise in costs for gold and copper. Both labor and energy prices are rising which will contribute to this.
If it is not the increase in labor and energy costs, it is an increase in environmental safety concerns. Newmont is another good example of this. It suspended its gold mine in Peru expressing concern at increased costs because of the recommendations in a government-commissioned review. Plans to build a reservoir at the Minas Conga site had to be relocated as Andean farmers protested over concerns that water supplies would dry up for them.
Environmental concerns and production costs are just two examples of obstacles that gold companies face that physical gold does not have to tend with. For this reason, it is quite understandable why those gold companies would underperform physical gold when the metal’s price falls and production prices increase. Companies like Barrick and Newmont have more to deal with that threaten profit margins when an environment like this occurs.
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