While today's gold sell-off hit bullion hard, mining stocks were thwacked. Heading into the East Coast lunch hour, spot gold prices were off 2.5 percent, while the stocks of gold producers proxied by the Market Vectors Gold Miners ETF (NYSE Arca: GDX) had tumbled 4.1 percent.
Ah, the leverage of mining stocks.
Miners have lost a lot of ground to bullion in the bull market, but have been struggling to regain their strength. We examined the progress miners made this year in our feature, "Are Gold Stocks Better For Your Portfolio?". To better understand the stocks' performance, however, we should regard a longer time frame.
When the GDX portfoliotracking a global 30-stock indexwas launched in 2006, it outperformed bullion, but very soon began to slip. Within a year, GDX's relative strength had fallen into negative territory, finally bottoming in October 2008. Miners were acting very much like other stocks in 2008.
Relative Strength (GDX To Gold)
Gold miners then rebounded until a year ago. In September 2009, mining stock momentum fizzled compared with gold, even though the stocks' price movements are highly correlated (76 percent) to bullion's.
And that's the key to understanding mining stocks' performance over the past four years. They're betteror have been betterthan stocks in general, but not as good as gold itself.
The numbers bear testimony to this:
Gold Miners (GDX) Relative Performance
23-May-2006 Through 18-Oct-2010
For their volatilitymeasured by its beta coefficientminers haven't yielded enough reward. The stocks' alpha is negative, meaning gold produces better risk-adjusted returns.
The story's completely different, however, when gold miners are put up against the recent performance of blue-chip stocks. Here, miners outshined the broad market, producing alphaor excess returnswith less volatility.
Keep this in mind as we head deeper into earnings season.
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