Gold: Commodity vs. Miners

Several years ago I started dabbling in commodities as part of my investing. As with my other investments my success has been mixed though positive in the aggregate. I prefer the miners (producers) over the underlying commodity since they have a higher beta - price moves more than that of the commodity, with both higher risks and potential returns.

Lately, perhaps out of angst, I got the idea that gold miners were underperforming the raw commodity. I believed this by regular tape reading, and noticing that when gold went up the miners did not rise in proportion, and when gold went down the miners descended in the expected manner. That is, there was poor upside benefit as gold again approached its record high price.

Was I right? I looked at a few comparison charts and saw that I was only partially correct. The phenomenon was there to be seen in the recent prices, yet it had no longer-term relevance. Ok, I didn't do an exhaustive calculation, I simply eyeballed some comparison charts. Here's an example:As expected the beta of the mining stock (Yamana) on a daily basis is higher than the gold ETF (a reasonable proxy for the commodity, in the short term) 50-day moving average, and the miner has indeed unperformed the commodity on both a daily quote and 50 dma. The disparity is however typical when you look at how they've compared over a longer period, though the spread is near its maximum over the past half year. The 50 dma curves track even more closely.

This is not a golden rule, and so can only be put down to my present misgivings about mining stocks from, perhaps, staring at price quotes more than I ought. It's merely one of the costs of seeking beta. Be careful if you invest on this basis, expecting the divergence to regress to the mean - the quotes for both can drop even while the divergence is reversing.

Note: I used NYSE:AUY rather than TSE:YRI since gold is priced in USD, and there is the factor of CDN:USD exchange rate to be included when investing in miners in Canada. This typically applies to other commodities as well.