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Gold Stocks Are Underperforming — But Why?
CNBC.com | August 23, 2011 | 11:04 AM EDT

Why are gold stocks underperforming? With gold prices near record highs, margins for gold producers have rarely been better. But gold stocks are flat to down on the year, while gold is up over 30 percent. Today, gold stocks are again underperforming gold. (See quotes for major gold stocks, below.)

There are several reasons:

1) Capital costs are increasing...in some high-cost countries (e.g. South Africa) the price to produce an ounce of gold is north of $800 an ounce. This is still profitable but costs are going up fast.

2) as gold goes up in price, countries demand more money in the form of taxation, not less;

3) investors in general are expressing more interesting in owning physical, not paper, gold. Ownership of gold bars, for example, is expanding more rapidly than ownership of gold ETFs.

3) money is moving out of equities in general;

4) some may be hedging gold by selling gold miners.

(Get a primer on commodity futures:)

Will any of this change? Possibly. Fuel and energy costs are about 40 percent of the operating costs of producing gold; a drop in oil priceswould help improve profitability. A more positive tone for equities in general would also help.

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