Gold Mining Stocks and ETFs Are Pretty, Unpretty - Barron's

Gold spot futures fell Monday to around $1,278.40 per troy ounce, down nearly 4% since I wrote "Don't Be Dazzled by Gold" early September. I warned that gold mining stocks and the exchange-traded funds that track them aren't perfect proxies for gold, and therefore, unsuitable as a replacement hedge.

Case in point: SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) are both down so far Monday, but VanEck Vectors Gold Miners ETF (GDX) and VanEck Vectors Junior Gold Miners ETF (GDXJ) are in the green.

Gold mining ETFs that hold small-cap producers, in particular, could have more capacity issues going forward. RBC Capital Markets' metals and mining team on Monday published a report saying that mergers and acquisitions are originating in the mid- and small-cap segment of the market and likely to continue. RBC's Stephen Walker wrote: 

Acquisition of smaller, single asset companies by the Intermediate & Junior producers is likely to continue as companies look to bolster their near/medium-term growth pipelines, such as the recent acquisition of Integra Gold (EGO) and Avnel (EDV).

Friendly mergers could play an increasing role as Intermediate & Junior producers look to combine in order to (1) diversify operational and geopolitical risk, (2) enhance financial strength, and (3) benefit from economies of scale. Recent mergers of this nature include KL/NMI and AGI/RIC.

As junior gold miners get taken out, indexes will have to reckon with the ever-shrinking universe. Remember what happened when the last gold ETF rush led to capacity issues? It wasn't pretty.

As for the large-cap miners, RBC expects most producers will be unable to increase reserves. Walker wrote:

The Senior North American gold producers remain ex-growth and the majority of capital investment programs are earmarked towards brownfield expansion projects. These projects are expected to sustain the existing production profiles over the next 4 to 6 years as mature mine grades decline and/ or reserves/resources at some mines are depleted...

We expect the larger North American miners to replace the reserves mined in 2017, however, at
present, there is little evidence to suggest most of the producers will be able to increase reserves. Exceptions are likely to include AEM, AGI, BTO, GG, IAG, KL, OGC and potentially EDV, SSRM and TXG.