The continuing mystery of gold

Actually, as previous posts seem to indicate, there is no great mystery to gold: the executive summary is that it is not so much that gold is going up as that the dollar is going down. What is, however, mysterious, is that the gold miners are not doing very well. Indeed, this year, gold prices (as measured by GLD) have gone up some 8%, which is (as of today, June 8 2011) considerably better than any of the stock indices. Gold miners, however, are performing truly abysmally: the chart below shows the performance of gold vs S&P 500, vs NEM --  Newmont Mining (NEM), which is down almost twenty percent year to date. A picture is worth a thousand words:

 Newmont's friends and competitors which constitute the GDX ETF are doing abut the same. Now, if gold prices were very high compared to the cost of extraction, then gold miners should be doing very well. If, s previously suggested, we have no gold bubble, then the cost of extracting gold out of the ground should be growing roughly as the price of the metal itself, and if the margins were roughly constant in percentage terms, the prices of mining stocks should be growing roughly as fast  as the price of gold. It has been suggested that the wear and tear on the mines is adversely affecting the price of gold miners. Let's test this theory, and look at the Price/Earnings ratio of long-suffering NEM versus that of the S&P.

The sharp-eyed reader will see that until the end of 2009, gold miners were the toast of the town, but since the beginning of 2010, they suddenly became the black sheep of the investment community, and the current P/E of Newmont (around 11) is only slightly higher than that of the S&P 500 at the nadir of the stock market collapse (3/9/2009, when it was a little over 10). Indeed, while NEM's share price (adjusted for dividends) has risen by 25% over the last five years, its P/E ratio has gone from around 70(!) to the current 11.

The only at all plausible explanation  for this strangeness I have seen is that some hedge funds use gold mining stocks to hedge their gold positions. Well, actually, this does not really make sense to me -- the obvious trade at this point is go long miners (perhaps hedging with GLD), but nothing else does either, since it seems that GDX and friends appear undervalued by some 30% (and there have been massive selling in the last couple of days).

NOTE: Samsara is long gold mining stocks, and has been for quite a while (somewhat to its chagrin).