How Gold Betrayed Wall Street

Earlier this year when billionaire and fellow London School of Economics alumnus George Soros got out of gold, it made headlines everywhere. Little noted was the fact that he increased his shares in gold miners this year.

Both moves backfired. Gold has gone up and the shares of gold miners have gone down. These shares have gone from cheap to extremely cheap.

Investors didn’t buy them when they were cheap. So will they buy them when they’re even cheaper? This is the question that is dividing investment pros. Most investors are sticking with their gold mining companies, believing a rebound is overdue.

They may be right but it’s far from a sure bet. The most important bullish factor is the price of the stuff miners dig up. Gold went up 12% this year. What happens if gold is flat? Or, worse, if it goes down in 2012? If mining companies fell when the price of gold was rising last year, what will they do this year if bullion has an off year?

The fact is, in the litany of reasons you’ll find in the Wall Street Journal article excerpted from below on why gold miners did so poorly last year, only one hits the mark. Huge amounts of money poured into the gold ETFs this year. They soaked up much of the bets investors made on gold. And there’s nothing out there to change such investor behavior next year. From the Wall Street Journal

Gold is up 12% this year but shares of gold miners have fallen almost 16%. Smaller gold miners are down almost 40%, based on the returns of leading exchange-traded funds tracking those stocks.

The surprising gulf has caused pain for some of the biggest names on Wall Street—including John Paulson, George Soros, David Einhorn, Seth Klarman and Thomas Kaplan—many of whom piled into gold shares over the past year, sometimes by shifting away from gold itself.

Bulls figured that gold miners had more upside than gold, partly because mining stocks outperformed during past bull markets for the metal.

But this year, gold miners have been hit by concerns that haven’t tarnished gold prices. Investors have worried that mining costs are rising, and that governments around the world are becoming more aggressive in taxing resources companies. They’re also concerned that gold miners might squander any windfall with ill-conceived acquisitions or other moves.

Plus, in a turbulent year, gold shares have suffered along with most other stocks as many investors fled to the safety of U.S. government bonds.

“When you sell your portfolio, you say, well, what’s cyclical, and that includes mining stocks,” says HSBC analyst Patrick Chidley, who called gold-mining stocks a “buying opportunity” in a June research report and still thinks they will pay off.

Investors who once turned to gold miners to gain exposure to bullion now can purchase exchange-traded funds that are backed by gold.

Gold miners have definitely lost their shine. It’s surprising that so many of the biggest names on Wall Street are not catching on.

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