After 4 years underperformance, Gold Mining stocks just beat the 2-month rise in gold...

OVER MUCH of the last 4 years, writes Ana Kostioukova at Hard Assets Investor, exchange-traded funds in Gold Mining stocks have risen less than physical bullion-backed funds.

That's not surprising. Returns of equity funds like the Market Vectors Gold Miners ETF don't correlate that closely to the price of gold. Not compared to ETFs like the $74 billion GLD, which holds actual gold.

Since September 2008, the GLD has returned 107.4%, or about three times as much as the S&P 500 index. Fund flows data tell the same tale; namely, that investors have flocked much more aggressively to physical funds than equity gold funds, despite the higher "collectibles" tax rate imposed on investors buying funds that hold physical gold.

To date, six Gold Mining trust funds have launched in the US market and have accumulated close to $13 billion in total assets. This number is dwarfed by the $87 million in assets held by physical gold-backed funds.

Gold has long been considered a safety net, and has done a good job of protecting investors from volatile markets, as the returns above suggest. So, the investment flows since the start of the global financial crisis should come as no surprise.

But as I said, something has changed in recent months, with returns on gold miner ETFs well over twice those on physical funds like GLD.

Part of it is certainly the fact that stocks have been moving upward this year, and gold miner ETFs are equity securities. A bull market in stocks will make all such securities relatively better off than a bear market. The opposite could be said of physically held gold ETFs: Their prices are based on demand for gold, which increases when the outlook on other investments looks grim.

The most impressive gains during this time period were notched by Van Eck's GDX and its sister product, the Market Vectors Junior Gold Miners ETF (GDXJ), as well as the PowerShares Global Gold and Precious Metals Portfolio (PSAU).

All have jumped by more than 30% in the past two months, compared with GLD's gain of 12% over the same period. An article in Barron's last week pointed to technical factors at play.

First, the price of gold versus gold equity has been artificially high over the past few quarters and is now leveling back to a more "normal" ratio.

Another reason is that the Gold Mining industry has been quite inefficient, putting downward pressure on profit margins. The past few years have been marked with heavy expenditures, with relatively little new profit streams to show for it. For example, deep-level mining in South Africa has been plagued by safety issues, depleting ore quality, poor infrastructure and skill shortages.

These inefficiencies and a series of acquisitions characterized by low valuations made investors squirmy.

However, according to the Wall Street Journal, there's a lot of evidence suggesting mergers with little or no premiums may be the ticket to increasing profits in the gold mining industry.

Typically, these types of mergers have no designated "new owner," and are instead consummated for mutual benefit. The success in such ventures usually comes sometime after the deal closes, as weaker companies combine to become one stronger entity with lower costs.

It's easy to see how economies of scale can only be a benefit to a resource-intensive industry such as mining. Then again, culture clashes and management infighting aren't unheard of.

One final factor is worth mentioning. As I wrote in a previous article, gold miner ETFs often hold companies that mine metals and minerals other than gold. Since gold is arguably the least cyclical metal – investing in companies that extract metals besides gold helps fuel price increases when consumer demand rises for products that use, say, rare metals in manufacturing. China's fascination with the iPhone and other electronics is an example of this.

A lot of cross-currents are at play here, but Gold Mining stocks are finally outperforming gold like so many have said they would, and I for one am excited to see if their Cinderella moment will last.

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