A Golden Divide: The Growing Split Between the Price of Gold and Gold Mining Shares

When all else fails, Gold (NYSE:GLD) will persevere. This mentality remains prevalent among investors who buy gold. Of all the precious metals (NYSE:DBP), it is by far the most popular. While other metals are subject to a variety of economic and industrial factors, the demand for gold reflects the degree to which people value the metal.

To provide an example, the demand for steel (NYSE:XLB) would decline provided that there was less need for the metal (to build skyscrapers, produce machinery, etc.). On the other hand, the demand for gold would only decline if the public perception of gold changed (i.e. if people ceased to regard the metal as a luxury). Gold (NYSE:GLD) is a much safer investment in that it can withstand economic downturn and does not fluctuate as much as paper currency. For these reasons, gold is often revered as a harbor to shield against market instability. In fact, fear of stagnation often results in a ramped-up price of gold, as people reallocate their investments to favor commodities that will be able to endure tough economic conditions.

It used to be that investors with an inclination towards gold (NYSE:GLD) would buy up shares of gold-miners as well as the metal itself. In recent years, gold and gold-mining (NYSE:GDX) shares have ceased to rise and fall in lockstep. Instead, the rise in the price of gold over the last few years has significantly outpaced the shares of gold-mining companies. Lets look at a few of the reasons why this might be the case.

For starters, it has become harder for miners to get at the gold, as all the easy-to-mine areas have been depleted. In spite of a huge surge of investment in gold mining over the past several years, mining companies are digging up only slightly more than they were a decade ago. Furthermore, the merger of mining conglomerates has led companies to become more reliant on collective reserves rather than inclined to seek out new areas to drill.

Other reasons for the lag in the stocks of mining (NYSE:GDX) companies have to do with the mines themselves. For one thing, many mines have begun to reach a point where years of wear and tear have made them extremely costly to operate. Another factor is that many mines are designed to dig up a variety of metals. Consequently, their profits are dependent not only on the price of gold, but also a variety of metals linked with heavy industry.

However, by far the greatest reason for a disassociation between the price of gold and shares of mining companies has to do with the ease with which investors can purchase gold directly. In order to buy gold, investors in the past would need to have gone through a miner. In the modern market, investors can purchase exchange-traded funds, each backed by a specified quantity of gold. The investor is thereby allowed access to the gold directly. In the short-term, this division will likely restrict the price of mining shares, as the price of gold continues to rise due to considerable uncertainty in the market.

For more expert analysis and guidance for gold, consider a free 14-day trial to our acclaimed Gold & Silver Investment Newsletter.