This past year was a curious one for the gold sector. While a lot of attention seemed to go toward the daily ups and downs of gold prices, the incessant wrangling over debt and budgets in much of the developed world, and the ongoing sovereign debt crisis in Europe, there were some interesting developments below the surface. Although the price of gold and the performance of gold miner stocks have never been in one-to-one lockstep, perhaps 2011 marks the beginning of an even greater independence in these trading patterns. (For more, see 5 Best Bets For Buying Gold.)
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For Gold Itself, Not a Bad Year
At the most basic level, gold had another strong year. While the year is not yet complete and the final tallies of the major market indexes are not yet written, it is all but inconceivable that 2011 will close without a fairly sizable performance gap in the favor of gold. As of this writing, the S&P 500 is basically flat for the year, while the SPDR Gold Shares (ARCA:GLD) is up better than 20%.

The reasons for gold's continuing performance are not hard to find. Western central bankers have been going to the mat to keep interest rates low, and the specter of high future inflation looms large. Moreover, risk and uncertainty abound. Will the Eurozone blow apart? Will Greece, Italy or Spain default? Will the U.S. have a new president next year? How will Congress balance the budget?

But for the Miners? Not So Much...
Curiously, this has not been a great year for the major North American gold mining stocks. Perhaps due to the abundance of options for investing in gold today, investors no longer have to buy quality gold mining stocks as the best available proxy for gold itself. With that necessity off the table, the actual operating conditions of these companies has become a more relevant consideration.

Unfortunately, the operating environment has not been so healthy. Cash production costs have jumped across the board, and many miners have reported discouraging production results. On top of this, more and more countries are making noise about expecting a larger piece of the pie when it comes to royalties on gold dug from their soil.

To that end, Newmont Mining (NYSE:NEM), IAMGOLD (NYSE:IAG) and Goldcorp (NYSE:GG) have all delivered rather similar single-digit performance this year. Apparently, the individual differences - Newmont introducing a gold price-linked dividend, IAMGOLD's status as a large niobium producer, and Goldcorp's lower operating costs - have largely been lost on the Street.

A Few Exceptions
That isn't to say that there haven't been exceptions. Yamana Gold (NYSE:AUY) has gotten some credit for its low cash operating costs and its strong production growth potential, and the stock is up almost 30% for the year. Elsewhere, Royal Gold (Nasdaq:RGLD) and Channel Islands-based Randgold (Nasdaq:GOLD) have also done well, climbing more than 40% and nearly 20%, respectively.

For the junior miners, the story was a little more familiar. Although it's generally true that junior miners will broadly track the price of gold, individual exploration, development and production results often considerably outweigh the movements of gold itself in the stock price. To that end, share prices for tiny Midway Gold (NYSE_AMEX:MDW) and Richmont Mines (NYSE_AMEX:RIC) both more than doubled this year, and Alacer Gold (OTCBB:ALIAF.PK) rose more than 50%, while Jaguar (NYSE:JAG) looks to finish the year in the red.

The Bottom Line
With the successful introduction of so many ETFs that allow investors to play the movement of physical gold, the investing dynamics on gold mining stocks have likely changed forever. While the price of gold itself still certainly matters, it seems that operating efficiency and production growth are likely to be more and more important in determining the performance of these stocks. For companies that can grow their production base at attractive costs, excess stock performance is clearly possible, but the market will longer be so patient with the laggards when investing in the metal itself is now so easy. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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