New Capital Rushes Into Gold Mining Funds

Small investors went crazy for specialty gold mining funds during October as the price of gold shot to historically high levels.

Inflows of new capital into mutual funds and exchange-traded funds focused on gold and silver miners surged to $421 million in the month. That's up more than six-fold from $64 million in September, according to new data from the Boston-based Financial Research Corporation.

The buying frenzy came as the price of gold climbed to $790 an ounce by the end of October, up 6% from $745 at the beginning of the month, reaching levels not seen in 27 years. As investors scrambled to join in with the sector surge, the mining stocks jumped even more. The Amex Gold Bugs Index, which tracks public gold companies, was up 8.5% during the period.

"The rally got a fair amount of publicity, and that type of publicity tends to get people thinking, 'Maybe I should join in as well,'" says David Kathman, a mutual fund analyst at Morningstar in Chicago.

Indeed, small investors chasing performance is nothing new, and a look at the even more spectacular performance of mining stocks in September explains some of the phenomenon.

Although bullion prices advanced about 10% that month, the value of mining stocks as measured by the Gold Bugs Index jumped around 17%. The earnings of gold mining companies tend to rise much faster than underlying bullion prices, and for that reason, a rally in gold can spark an even bigger increase in mining stocks.