Gold stocks have historically outperformed the gold price by roughly a 3-to-1 ratio. This means that a 5% rise in the price of gold generally translated into a 15% rise in the miners. Recently, this leverage has eroded to about a 1-to-1 ratio, or lower at times, according to BofA-ML.

Leverage, of course, can work in both directions, and the beta-to-bullion ratio for many gold stocks is stronger during downward price movements and weaker during the upward ones. This means that the gold stocks are being punished for any downside volatility in gold prices, without being rewarded for any increases.

This has been unilateral across different market cap sizes. This chart shows the average beta-to-bullion response for upward movements in the gold price has been declining since 2009. Senior gold stocks have seen the largest decline with their average beta dropping nearly 60%.

One likely reason for the loss in upward leverage has been the maturation of the gold investing market. In the past, investors looking to gain gold exposure without the headaches of taking physical possession of gold bullion turned to gold equities. Today, the proliferation of bullion-backed ETFs and the birth of small, gold bar buying programs in Asia have unlocked additional options.

I had lunch with CIBC's Barry Cooper, gold-company wizard and one of the industry's best analysts, last week. He sees this recent phenomenon as "a market-sentiment driven event that will pass as fundamental financial drivers kick in to support share prices and drive them higher." However, the trend could continue as long as the cost of mining operations continues to inflate. Cooper modeled a case study that showed equities can produce an inferior return relative to bullion when the price of an ounce and the cost to produce it rise in tandem despite the opportunity for companies to use higher prices to expand production or increase reserves.

According to Cooper, "the average global cost per ton has been rising at a rate that is slower than the gold prices increase; however, it has also been accompanied by a declining grade profile for most operations." The average grade of a gold deposit has declined 21% since 2005 but higher bullion prices have made it economically viable for gold companies to pursue higher cost projects and keep lower cost, high grade operations off line in case gold prices pull back.

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