Huge Gaps Between Metals, Miners ETFs

by on August 8, 2012 | ETFs Mentioned:

In recent years interest in exposure to natural resources has surged, thanks perhaps in part to the ease of access afforded by the exchange-traded structure. While commodities have always been popular with active traders, they’ve caught on in recent years among those investors with a longer time horizon. The impressive performances turned in during a bull commodity market have highlighted the potential of this asset class, while the low correlations to stocks and bonds have been enticing as well [see also 5 Equity ETFs In Steady Uptrends].

While physically-backed and futures-based products that offer direct exposure to commodities remain extremely popular, many investors have also embraced ETFs that deliver indirect exposure to natural resources through stocks of the companies that are engaged in the extraction and production of the resources. The idea behind this approach is pretty straightforward: because the profitability of mining companies depends in large part on the market price for their goods, these securities should exhibit a relatively strong correlation with the underlying resources.

There are some very appealing aspects of this approach; by utilizing stocks, investors can avoid the nuances associated with futures-based strategies. But, as detailed below, achieving exposure to commodities through stocks has its potential drawbacks as well. Specifically, the assumption that mining stocks will move with spot metal prices is a flawed one; in many environments, there can be substantial gaps between the two.

Gold: GLD vs. GDX

As detailed last week, the gaps between the performance of investments in physical gold and mining stocks has been massive recently. As gold has held its ground in 2012, mining stocks have been hammered as a result of poor earnings and general economic anxiety [see Gold ETFs In 2012: The Good, The Bad, And The Ugly].

It’s worth noting that many gold miners hedge their gold exposure, but that strategy can obviously diminish the correlation between the price of the metal and the profitability. But as Barrick Gold Corp reported recently, rising spot prices in the yellow metal have done nothing to buffer the rise in production and operating costs many in the industry are now experiencing. And as gold miners struggle to turn out profits, the gap between these stocks and gold spot prices continues to widen.

Platinum: PPLT vs PLTM

ETF YTD 1 Year
Physical Platinum Shares (PPLT) -1.1%  -22.7%
Global Platinum Index Fund (PLTM) -25.1% -48.3%
*As of August, 2012

Spot prices for platinum saw a major spike earlier this year, but as of late, the precious metal has seemingly lost its footing. Both phyically-backed PPLT and the platinum mining ETF PLTM have landed in negative territory in 2012, posting poor year-to-date and one-year returns. But between the two funds, holders of PLTM are probably the most unhappy.

What many investors may not realize is that platinum demand is largely dependent on automobile production, since half of the supply of the shiny metal goes towards emission control devices for cars. And with eurozone troubles putting a serious dent in automobile demand, platinum miners have been taking the brunt of the decline.

Silver: SLV vs. SIL

ETF YTD 1 Year
Silver Trust (SLV) -2.3%  -35.1%
Silver Miners ETF (SIL) -15.0% -34.3%
*As of August, 2012

Silver has not been able to hide behind gold’s shadow thus far in 2012, as the metal took a significant tumble from its record high of $49.83 per troy ounce last year. Compared to its competitor, silver is unique in that it can act as both a “safe haven” investment and as a risk-related asset; the metal is often used as a hedge against economic uncertainty, but it also has various industrial applications. Silver’s dynamic risk-return profile has essentially turned on itself, placing downward pressure on prices. Although global uncertainty has heightened, investor’s demand for the metal as a safe investment has faltered, and the slowdown in industrial activity has further depressed silver’s price. Both physically-backed SLV and the silver mining fund SIL are in the red on their year-to-date and one-year returns. The risk-laden SIL, however, has posted far worse returns in 2012.

Copper: JJC vs. COPX

ETF YTD 1 Year
DJ-UBS Copper ETN (JJC) -3.3%  -15.3%
Copper Miners ETF (COPX) -12.9% -29.1%
*As of August, 2012

The global economic slowdown has been particularly rough on copper this year, as demand for the industrial metal has been seemingly waning. China, one of the major consumers of copper, is exhibiting an alarming slowdown in economic growth, and as the powerhouse nation curbs its industrial production, copper demand continues to contract. The slow recovery of the homebuilding industry has also hurt the metal, further depressing prices. The futures-based JJC and the copper miners ETF COPX have both struggled over the last year, posting negative year-to-date and one-year returns. Copper miners, however, have been hit particularly hard, as the industry is forced to curb production while rising operating costs cut into already lagging company profits [see also 4 Little Known Factors Driving The Price Of Copper].

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Disclosure: No positions at time of writing.