Commodities Corner: Opportunity knocks in gold, silver mining stocks

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Reuters

A worker at the Ariab mine operated by Sudan and Canada?€™s La Mancha Resources. Gold mining stocks have lagged rising gold prices as economic worries weigh on equities.

SAN FRANCISCO (MarketWatch) ?€" Opportunity knocks in the metals mining equity space, but wary investors are too afraid to open the door.

It?€™s not that investors haven?€™t noticed that metals mining shares have severely lagged the performance in gold and silver prices. The weak overall stock market has simply made investors reluctant to believe there?€™s a genuine profit prospect.

It?€™s happened before and it?€™s happening again.

?€œWhenever there is general equity weakness and risk aversion, miners underperform,?€ said Jeb Handwerger, editor of market analysis provider GoldStockTrades.com. The credit crisis of 2008, the 1987 stock-market crash and the European sovereign-debt crisis that started last year are all examples.

Then ?€œwhen markets turn around, miners usually make huge strides far outpacing bullion,?€ he said.

The Market Vectors Gold Miners ETF /quotes/zigman/420125/quotes/nls/gdx GDX +2.99% , which provides exposure to mainly gold mining stocks, has fallen 8.4% year-to-date, compared with a 17% gain in the SPDR Gold Trust /quotes/zigman/41663/quotes/nls/gld GLD +0.68%  and a rise of 2.5% in the iShares Silver Trust /quotes/zigman/417006/quotes/nls/slv SLV +1.29% , which are both backed by physical metals holdings. For the same period, the S&P 500 /quotes/zigman/3870025 SPX +1.74%  has fallen over 4%.

Since the end of last year, gold futures /quotes/zigman/661658 GC1Z +0.80%  have added around 17% and silver futures /quotes/zigman/663010 SI1Z +1.59%  have climbed about 2.4%.

?€œDuring periods of financial crisis or worry about the same, it is normal for the physical price of gold to far outperform the gold miners,?€ said Robert Barone, a principal and investment adviser representative of Ancora West Advisors in Reno, Nev.

As the price of gold shot up in August, gold mining stocks were left behind.

The metals market has seen ?€œindiscriminate stock dumping by investors afraid of falling equity markets, regardless of fundamentals,?€ said Martin Hennecke, associate director at Tyche Group Ltd. in Hong Kong.

And the poor stock performance has ?€œbrought gold mining company valuations down to attractive levels,?€ he said.

Rational thinking

The rationale behind the drop in mining stocks makes sense against a backdrop of a weak overall stock market, but it?€™s not necessarily a justified move given the strength in gold and silver prices.

It?€™s true, that ?€œdownside risks to the economy will have a considerably more direct bearing on corporations than on precious metals,?€ said Julian Phillips, an editor at GoldForecaster.com, and ?€œthese bloated risks in an industry that has traditionally paid over very little by way of dividends to investors, have made the potential rewards ?€? far less attractive.?€

Besides, there are quite a few more concerns investors need to deal with if they?€™re trading metals mining stocks.

Some of the ?€œmoving parts?€ for the miners include debt levels, free cash flow, environmental concerns and regulations, mining safety issues, reserves and exploration prospects, quality of management and earnings history, said Ancora?€™s Barone.

The change in the investment landscape for metals may have also contributed to further weakness for the miners.

A large portion of institutional investment has gone directly into gold and silver exchange-traded funds ?€" taking away ?€œmoney destined to go into mining shares,?€ said Phillips. ?€œThe pool of funds available for mining share investments has diminished.?€

/quotes/zigman/420125/quotes/nls/gdx

$ 57.96

+1.68 +2.99%

/quotes/zigman/41663/quotes/nls/gld

$ 163.40

+1.10 +0.68%

/quotes/zigman/417006/quotes/nls/slv

$ 31.34

+0.40 +1.29%

/quotes/zigman/3870025

0

1,224.58

+20.92 +1.74%

1

2

/quotes/zigman/661658

3

$ 1,681.80

+13.30 +0.80%

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5

/quotes/zigman/663010

6

$ 32.17

+0.50 +1.59%

7

8

Authors: mining - Yahoo! News Search Results

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