Gold-Mining Shares Lag During Gold's Recent Run

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"Miners' underperformance is a clue we're not at the end of the bull run."

Share prices of gold-mining companies have lagged gold itself during the metal's recent run to record highs.

Gold has surged in 2011, but the Philadelphia Gold/Silver Index of mining stocks was nearly flat for the year to date. The Gold Bugs Index of unhedged gold stocks was up 4%.

There also has been an underperformance by silver stocks as silver rocketed to 31-year highs, said Daniel Brebner, head of metals research at Deutsche Bank.

Shares of gold producers have outperformed gold itself for much of the bull run that began around a decade ago, sometimes at a rate of three or four to one. Depending on the index, gold stocks outperformed gold by roughly four percentage points last year, said Jeff Clark, precious-metals analyst with Casey Research. "And now year to date, they are not outperforming gold as a group."

Analysts and fund managers attribute the stocks' collective underperformance to a simple preference among many investors to hold the metal itself at the moment, as well as rising operating costs for mining companies that limits profits.

These costs are also occurring in other types of mining, such as copper and coal, said Kimberly DuBord, director of research for Briefing Research. "It's not just gold miners," she said.

Brebner also said it is becoming increasingly challenging for many companies to keep boosting mining output.

Meanwhile, mining companies face political risk in certain parts of the world, analysts said.

Clark sees the underformance of mining equities versus gold as a sign that a "mania" has not occurred yet.

"You would think gold stocks would not only be outperforming the metals but demonstrating three to four times the leverage that they have in the past. And they're certainly not doing that. So that's a clue we're not there yet."

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