Gold Miners: No Depression

Gold and gold miners are generally thought to do best when the market is worried about inflation. Yet the recent rally in gold miners like Goldcorp (GG), Eldorado Gold (EGO) and Randgold Resources (GOLD) has come despite an increase in worries about deflation.

Goldcorp, for instance has gained 30% this year, while Eldorado Gold has risen 27% and Randgold Resources is up 31%. The Market Vectors Gold Miners ETF (GDX) has gained 29% this year, more than double the SPDR Gold ETF’s (GLD) 14% rise.

So what’s happening? JPMorgan’s John Bridges thinks he has the answer:

It's difficult and worrisome to consider scenarios for gold equities other than inflationary ones. But the historical record does include success for gold equities in deflationary times too. The fundamentals for this strength are more difficult to reconcile with the risk that gold prices may outperform not by rising but by not falling. Listed gold equities Homestake Mining subsequently purchased by Barrick Gold (ABX) and Dome Mines, now parts of Goldcorp were operating in the 1930s and outperformed. Part of this outperformance probably resulted from the way that the gold price stepped higher as Washington tried to devalue the dollar to kick start growth but part of this probably resulted from the simplicity of gold equities compared to other listed equities that require a strong economy to perform.

JPMorgan’s favorite gold stocks include Eldorado Gold, Goldcorp and Randgold Resources, Bridges says.

Eldorado Gold has gained 0.6% to $7.20 at 11:09 a.m., while Goldcorp has risen 1% to $28.09, Randgold Resources has dropped 0.2% to $82.29 and Barrick Gold has advanced 1.4% to $20.62. The Market Vectors Gold Miners ETF has gained 1.2% to $27.24, despite the SPDR Gold ETF rising just 0.1% to $131.89.