Miners Miss Out on the Golden Age

April 17, 2013, 1:58 p.m. ET

Miners Miss Out on the Golden Age


For gold miners, the past five years should have been similar to what tech companies experienced in the late 1990s. Back then, the Internet promised a brighter tomorrow; in recent years, it felt more like there might not be one at all. Such fear suits gold, and it is still up 45% over five years, despite the recent slide. Not so the gold miners, who supposedly offer leveraged exposure to price moves. The Philadelphia Gold & Silver index, down by almost half on a five-year view, is now back to where it was in December 2008. In other words, four years or so of subsequent gold fever may as well have not happened.

MI-BV406_GOLDHE_NS_20130417174504Worse, for those who bought the sector five years ago, the highest gain was 19% if they sold at the index’s April 2011 high point. With gold itself, investors could have doubled their money if they sold in September of that year.

One problem is proliferating exchange-traded funds making it easier to gain direct exposure to gold. This negates needing to own the miners themselves, where cost inflation and ill-considered acquisitions have squeezed margins and cash flow. Meanwhile, gold ETFs, so supportive on the way up, now represents a hot-money overhang. At the end of 2012, they held metal equivalent to 90% of annual mine supply, according to HSBC HSBA.LN -0.97% .

Miners’ costs, already squeezing margins, can’t be scaled back as quickly as an ETF portfolio, so falling gold prices hurt. All of which suggests that, having enjoyed little positive leverage to the most favorable environment for gold in a generation, the miners will provide a hefty dose of negative leverage as gold’s popularity wanes.

Makes you wonder why own these stocks at all. At least when the tech bubble burst, we still had the Internet.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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