Gold mine funds outshine bullion funds by two times

Investors seeking a hedge against a waning U.S. economic recovery and escalating conflict in Ukraine made twice as much money buying gold-mining shares rather than the metal the companies produce.

The Market Vectors Gold Miners ETF climbed 25 percent this year, more than double the 12 percent advance for the SPDR Gold Trust, the biggest exchange-traded product backed by bullion. This is the first quarter the company fund is outperforming the metal ETF since 2012. Assets in the producer fund expanded 6 percent in the past four weeks, compared with a 2.7 percent gain for the Gold Trust, data compiled by Bloomberg show.

Investors are returning to the shares after companies in the benchmark Philadelphia Gold & Silver Index in December traded at the cheapest ever relative to the price of bullion. Last year’s 28 percent plunge for the precious metal, the biggest since 1981, forced producers including Barrick (ABX) Gold Corp. and Goldcorp Inc. to cut spending and sell assets. The nine largest mining companies will generate free cash flow in 2014 for the first time in three years, according to analysts’ estimates compiled by Bloomberg.

“Miners got caught in the crush,” said Peter Sorrentino, a senior portfolio manager who helps manage about $4.7 billion at Huntington Asset Advisors in Cincinnati. “Some of them lowered production and sold off mines and announced writedowns. They fell to a level that bore no resemblance to the underlying economic value, and started to look so attractive.”

The Philadelphia Gold & Silver Index, which tracks 30 companies including Barrick and Kinross Gold Corp., gained 21 percent this year, while gold futures in New York rose 13 percent. The Standard & Poor’s GSCI Spot Index of 24 raw materials advanced 1.6 percent, and the MSCI All-Country World index of equities dropped 0.3 percent. The Bloomberg Dollar Index, a gauge against 10 major trading partners, slid 0.7 percent. The Bloomberg Treasury Bond Index gained 1.8 percent.

A rally for U.S. equities and muted inflation prompted some investors to give up on gold last year, sending prices to the first annual decline since 2000. The slump forced mine operators to take at least $30 billion of writedowns. Barrick, the top producer, sold about $1 billion of assets, suspended mine construction and reduced so-called all-in sustaining costs in the fourth quarter to $899 an ounce, down 14 percent from a year earlier. Vancouver-based Goldcorp’s (GG) costs slid 11 percent.

Their efforts are starting to pay off. The nine largest producers by sales may generate $2.31 billion of free cash flow this year and $4.97 billion in 2015, compared with negative $5.16 billion last year and minus $4.51 billion in 2012, according to analysts’ estimates compiled by Bloomberg.

Even as lower costs show miners are now “geared toward growth,” labor unrest means investors are safer buying the metal rather than company shares, said Jeff Sica, who helps oversee more than $1 billion of assets as president of Sica Wealth Management in Morristown, New Jersey.

Workers at South African gold mines are battling for the right to strike, as they attempt to join their counterparts at the country’s platinum sites who have not returned since walking off in January. The Johannesburg Labour Court on March 14 delayed a ruling on whether a strike would be legal.

While investors have bought the Market Vectors Gold Miners ETF (GDX) at a faster pace than the physically-backed ETP in the last four weeks, the total inflows have trailed those going to bullion. The SPDR Gold Trust attracted $908.1 million, while the companies’ fund saw an inflow of $493.3 million, data compiled by Bloomberg show.

“The precious-metals industry continues to suffer because of the labor problems, and they have to resolve the issue before I would feel absolutely comfortable to invest in the sector,” Sica said. “Demand for physical gold continues to rise.”

Gold futures in New York reached a six-month high yesterday amid escalating tensions in Ukraine, where the U.S. and the European Union are threatening sanctions if Russia doesn’t back down from annexing the Black Sea province of Crimea. Holdings in ETPs backed by the metal have climbed for three straight weeks, the longest stretch of gains since August.

The Market Vectors Gold Miners ETF has still attracted more money in the past five years, with inflows totaling $7.96 billion, compared with a withdrawal of $10.44 billion for SPDR Gold.

Billionaire George Soros, who last year sold his entire stake in the SPDR Gold Trust, owned 970,344 shares of the Market Vectors fund as of Dec. 31, a government filing showed. The ratio of the Philadelphia Gold & Silver Index to gold futures reached 0.066 on Dec. 5, the lowest since the data begins in 1983. The measure was at 0.075 yesterday, and averaged 0.16 in the past 10 years.

“A lot of the mining stocks were oversold and were more attractive on relative basis to gold,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “The miners have lowered the cost of production to become leaner. As prices of gold started improving, momentum investors started coming in. We are still in that upward trend.”-Bloomberg