(Bloomberg) — The red-hot market for gold-mining companies has made the shares too expensive for some investors, even though they remain bullish on the outlook for bullion.
Earlier this year, fund managers including George Soros had gobbled up shares of producers such as Barrick Gold and Newmont Mining in a bet that the surprise rally in the price of the metal would spark a surge in profit. After a five-year slump marked by mine closures and losses, the companies were cheap. But now, many are worth twice what they were in 2015 — after rising at almost five times the rate of the commodity — so funds have begun unloading the equities while retaining or expanding holdings in physical gold.
The run-up has left major producers valued as if gold prices were 24% higher than now, Morgan Stanley estimates. UBS Group AG predicts better returns from bullion as low interest rates and sluggish global growth enhance the appeal of the metal as an asset. There are already signs of a shift by investors. While ETFs linked to precious metals saw a net inflow of $2.2 billion in the past month, the Bloomberg Intelligence Global Senior Gold Valuation Peers Index of 14 mining companies fell 7.4%.
"Just on a valuation aspect, it's hard for us to get too excited about the equities at this point," Jo Battershill, a global mining strategist at Zurich-based UBS, said by telephone from London.
In the second quarter, Jon Jacobson's Highfields Capital Management sold half its 2.5 million shares in Goldcorp, while Global Thematic Partners shed all 1.95 million shares in Greenwood Village, Colorado-based Newmont, filings show. Adage Capital Partners sold more than half of its stake in Yamana Gold and 31% of Toronto-based Barrick, the largest gold miner.
Those sales don't necessarily signal a bearish view on gold. With the Federal Reserve keeping U.S. interest rates unchanged since December and other central banks boosting stimulus to support growth, the metal had its best first half in four decades, rising 25%. Yields on about $9 trillion in government debt in developed markets have dropped below zero, meaning those who buy the debt and hold to maturity stand to lose money. According to UBS, bullion could rally to $1,500 an ounce next year from about $1,324 now.
Even after shares of major producers started falling this month, the Bloomberg index of major gold-mining stocks is up 119% this year. In the second quarter, investors valued the gold reserves of those companies at $182 an ounce, almost double the amount in the fourth quarter of 2015 and the highest since 2012, a year after the precious metal climbed to a record, data compiled by Bloomberg Intelligence show.
One of the starkest examples of diverging sentiment between gold and the companies that produce was the second-quarter shift by Soros Fund Management. According to a government filing, the money manager sold almost all its stake in Barrick and bought 240,000 shares in SPDR Gold Shares, the largest ETF backed by the metal.
Even some investors who take their trading cues from market-reading computer algorithms were exiting gold producers as the shares rallied in the quarter. Renaissance Technologies, a $32 billion New York hedge fund founded by Jim Simons, sold almost all its holdings in Goldcorp and Yamana and more than a third of its stake in Barrick during the three months ended June 30, filings show.
There are still some betting that the rally in gold-mining shares isn't over. Arrowstreet Capital bought 14.2 million shares of Barrick, 13.4 million shares in Goldcorp and 14.8 million shares in Yamana in the second quarter, regulatory filing shows.
While some high-profile funds cut gold-mining stocks during the second quarter, overall inflows continued, albeit at a slower pace. Funds added 28 million shares to their Barrick holdings in the second quarter, according to 4,201 filings compiled by Bloomberg as of Aug. 25. That's down from 58 million three months earlier, based on data from 4,237 filings.
Interest in the precious metal continues to grow, with funds adding 43 million shares in the SPDR Gold ETF during the second quarter, after a 46 million-share gain in the first quarter.
"If they think gold prices are going up, then gold-mining companies should be able to deliver that operating leverage moving forward," said Dan Denbow, a portfolio manager at the $870 million USAA Precious Metals & Minerals Fund in San Antonio. "If the Fed starts raising rates and gold prices pull back, then the more levered names who have been the big out-performers will probably come down the most, too."
With the exception of a few laggards, including Goldcorp, many of the major gold producers already are trading above the price targets set by Morgan Stanley.
"The stocks have run really fast, really far and are pricing in more upside in gold at this point," said E van Kurtz, the New York-based bank's analyst for North American metals and mining. "I don't think it's a great risk-reward anymore."