The perils of serving two masters

Carolyn Cui and Liam Pleven at the Wall Street Journal have a nice piece today on the competition between gold ETFs and gold mining companies for the investment dollars of gold bugs.

Share prices of gold-producing companies have lagged the huge run-up in the price of gold, as well as the broad stock market, for years. Investors, instead, have poured billions of dollars into exchange-traded funds backed by actual bullion, believing that would provide purer exposure to gold prices and avoid unrelated stock-market risk.

But the companies are fighting back:

In April, the Denver company introduced a “gold-price-linked dividend,” promising an increase of 20 cents a share in its annual payout for every $100-an-ounce rise in gold prices. Newmont receives about $300 million in additional cash after taxes for every $100 increase in gold prices, Mr. O’Brien said. Based on current gold prices, the company is expected to declare a 25 cent quarterly dividend in July, a 25% rise from April’s.

The promised payouts, although still small compared with traditional big dividend payers such as utilities or health-care providers, are aimed at setting gold stocks apart from bullion or gold ETFs.

I say the mining companies should stop trying to battle the tide and instead declare good riddance.

Gold mining companies have long been a funny bunch, in no small part due to the need to ingratiate themselves with the peculiar investor clientele that are gold bugs. The investment and operating decisions needed to maximize the value of mining assets are different from the decisions needed to maximize exposure to gold prices. Normal shareholders care about the former. Gold bugs are fixated on the latter. Until recently, corporate executives have had to do a dance trying to keep both groups happy. But ultimately there is an unbridgable conflict that can only be papered over by the type of “constructive ambiguity” in corporate decision making and pronouncements that ought to be reserved for international diplomacy.

If the rise of ETFs gives the gold bugs a place of their own, then mining execs can stop doing the dance and get around to maximizing the value of the mining assets. Then, finally, shareholders could expect some real returns.

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