Salient to Investors:

Gold producer shares head for the first back-to-back annual drop since 1998 despite gold’s 12 years of gains because of failure to control expenses – the average cost to extract an ounce of gold by the largest miners rose 23 percent to $584.70 in 2011 versus a drop of 12 percent to the lowest since 2007 for silver.

Gold companies face competition from gold-backed ETPs. Money managers have increased stakes in physical gold, pressured executives to resign, or shifted into silver. Direct holdings of gold has more than tripled in five years. George Soros raised his stake in gold ETPs in Q3 2012 by 49 percent from Q2.

John Wong at CQS has increased his silver holdings and said a lack of capital discipline is the biggest issue – management has relied on gold prices to bail them out.

Evy Hambro at BlackRock said the poor performance is due to an appalling track record of value destruction by management.

Markus Bachmann at Craton Capital Precious Metal Fund said the costs are too high and the returns not good enough, but sees the cost inflation being contained and a healthier industry in 2013.

The median analysts expects gold to rise to $1,850 in 2013.

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