Gold outshines producers

Gold rallied to yet another record high of over USD 1700 an ounce, following the downgrade by Standard & Poors of the U.S. credit rating to AA+. The SPDR Gold Trust ETF (GLD) has been in high demand, both by the long and short sides of the market in securities lending. Despite the onward march in the price of gold bullion the shares in the gold producers have treaded water, having risen by an average of only 2% over the past quarter to last Friday (a c.7% rise if you exclude last week). In contrast, gold futures are up 13% over the same period and 16% YTD. We look at holdings by institutional asset owners alongside demand to borrow to see whether investors think the lagging performance of gold miners presents a buying opportunity as investors search for quality? Companies covered include: US Gold Corp (NYSE:UXG), Detour Gold Corp (TSE:DGC), Gold Resource Corp (AMEX:GORO), Newmont Mining Corp (NYSE:NEM).

A screen of global gold producers with a market cap in excess of USD 100 million holds an average short interest of just 1.77% of total shares outstanding. There are a number a stocks displaying bearish sentiment.

Investors short the explorers

Whilst most miners in the sector have posted impressive earnings for the second quarter, companies more focused on exploration have gained only marginally.

US Gold Corp (NYSE:UXG) reported its quarterly earnings at the end of last week with updates on how its exploration was going and saw its share price fall closer to annual lows. Institutional investors and who lend have been bullish and raised their long exposure by over 50% over the second quarter, perhaps believing this relative underperformance compared to the physical futures to be a buying opportunity. Yet this is the most shorted stock in the sector. Short interest trebled to annual highs of 16% of the total shares in April, which represented half of the lendable supply out on loan.

Canadian listed Detour Gold Corp (TSE:DGC) is also focused on exploration and is the second most shorted stock in the sector. As the share price oscillated between CAD 24 and 34 institutional ownership has been relatively flat and short interest has steadily increased since December from 1% to record highs of 12.5% of total shares outstanding. The recent price drop has led to some short covering over the past two weeks, reducing short interest to 9% of total shares outstanding.

A rush for small cap miners

Miner, Gold Resource Corp (AMEX:GORO) describes itself as a low-cost gold producer. Since declaring commercial production in July 2010, it has been drawing investor attention by paying out special monthly dividends. Its share price has performed well over the past year and institutional investors have been overweight their historical positions, having doubled holdings in the last quarter alone to 8% of all shares. However, short sellers have been building positions since May, with short interest having trebled to 8% of the total shares, which represents almost all the stock that is available to be borrowed.

Newmont Mining Corp (NYSE:NEM) missed earnings estimates for the second-quarter due to lower output and higher production costs, but the impact was offset by the rallying gold price. In early trading yesterday, the stock was highlighted as a top gaining stock in the U.S. markets. Short interest is low at 1% of total shares outstanding but institutional investors have moved underweight and reduced their holdings by 13% since March.