Gold Miner Stock Investment 2009

IF GOLD PRICES jump in 2009, will gold miner stocks make their long-hoped for leap as well?

Last year saw the Amex Gold Bugs index of 15 major gold stocks lose more than half its value. Now as 2009 begins, "It's difficult to see when the bottom will come for gold miners," reckons one investment fund manager, Didrik Van Zuylen.

Head of the PriFund Gold & Precious Metals investment fund for Rothschild Bank in Geneva, he lost his clients 6% in the year-to-November. Yet data from Citywire puts that performance top out of 21 gold and precious metals fund it tracks – down on average by 28%.

The highly-respected Tocqueville Gold Fund starts 2009 some 47% down from the same time last year. Hinde Capital, a London hedge fund that trades bullion, options and gold mining stocks, ended November 24% down from its launch 13 months earlier.

Yet gold itself held flat overall in dollars, and rose strongly against everything else. Just what's happened to gold mining's famed "leverage" to the gold price – and will it return in 2009...?

"While gold has posted an impressive 195% rise in ten years," writes Paul Burton, a former mining engineer and now chairman of the FTSE Gold Mines Index Committee in London, "the XAU has grown slightly less, by 173%."

Most spectacularly over the three years to 2009, world No.1 gold miner Barrick Mining "has underperformed the gold price, this time substantially."

In other words, "the relationship has changed" from the 3-to-1 leverage in gold miners enjoyed by investors during the 1990s – a view confirmed by further analysis from CIBC's Barry Cooper.

Tracking gold miner stocks against Barrick Gold and its No.2 competitor, Newmont, "gold increased at an annualized percentage of 23%" from 2005 towards 2009, "whereas Barrick increased by 19%."

The first half of that period saw Barrick and Newmont outperform gold, but even before the financial crisis began – and investors fled risk for safety – the metal did better than miner investments.

Now junior gold miners – always a high-risk proposition – are struggling for finance, and many are mothballing young projects amid the credit crunch. With debt still expensive (and hard to raise), gold miner investors might want to consider the threat of fresh equity issues diluting their outstanding equity, too.

Fact is, in short, the attractions of gold amid today's financial crisis just don't apply to gold miner investment. The miners bring management risk, market risk, credit risk and geopolitical problems to your investment. Gold bullion, in contrast – if owned outright – simply offers a default-free store of value, instantly priced and easily traded on the world's international gold market.