We are asked constantly why it is that the gold mining shares have lagged so badly behind gold itself, and we’ve answered relentlessly in the same fashion for years: Why would anyone want to own a “derivative” of gold… a gold miner’s shares are indeed a derivative… when one can make the careful, implied “bet” on the direction of gold by owning GLD, or gold bullion or the golf futures, all of which are the purer plays on gold itself. Owning a gold mining company one is exposed to the vagaries of management; to the vagaries of Mother Nature and to the vagaries of mine accidents, capriciousness and duty dereliction. Better it is to have the most direct exposure and so we’ve owned only GLD and/or the futures.

However, we’d really not understood how massively have the gold shares underperformed gold’s move until we read our friend’s… Ian McAvity’s… monthly yesterday wherein he noted in his discussion on gold and gold shares that:

The top 3 South Africans and Newmont are still below their levels of the 2006 top at $732
gold. Where’s the implicit profit leverage from rising gold prices?

This was and is hard for us to believe that Newmont and ASA Ltd are at levels prevailing when gold was $730 but it is true. ‘Tis shocking, but true. There will come a time when the gold shares will out-perform gold, but likely that will come when gold’s plunged rather than as gold trades seemingly, relentlessly higher.