By Brad Zigler
You'd think last month's earnings releases would have given a boost to gold stocks, since four of the five components of the NYSE Arca Gold Miners Index (GDM) reporting posted positive results. Yet, going into the last week of October, miners' stock prices slumped, only to emerge at the end even lower.

Of course, you could have said virtually the same thing about gold itself, but stock losses were tenfold the slippage in bullion. The exchange-traded fund tracking the miners' index—the Market Vectors Gold Miners ETF (NYSE Arca: GDX)—gave up 9.3 percent last week, while the value of the metal-holding SPDR Gold Shares Trust (NYSE Arca: GLD) eased only 0.9 percent.

So why should good news produce such bad results?

Well, to a certain extent, there's truth behind the old adage "buy on the rumor, sell on the fact." There were whispers on the Street—some good, some not—about the miners' numbers.Agnico-Eagle Mines Ltd. (NYSE: AEM), for example, was expected to put up per-share earnings of 20 cents for its third quarter; before its earnings report, the company's stock traded above $68. Analysts then started talking up a 19-cent figure. When the company posted an 11-cent loss, however, traders marked down Agnico's shares by more than $15.

Disappointment with poor financial results is understandable, but even the miners' good news went unrewarded. Newmont Mining Corp. (NYSE: NEM) blew the doors off analysts' earnings guesses, taking in 79 cents a share after the sell side forecasted earnings of only 57 cents. Newmont's price reaction? Shares slumped nearly $2.00 before settling halfway up the $43 handle.

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A similar scene played out when Barrick Gold Corp. (NYSE: ABX) announced a 54-cent-per-share operating profit. The Street had been eyeing a 47-cent profit before hedging charges, and rewarded company shareholders with a 3 percent haircut.

Likewise, Gold Fields Ltd. (NYSE: GFI) and Eldorado Gold Corp. (NYSE: EGO) both turned in results that met or exceeded Street expectations, only to find sellers anxious to work their share prices lower. But rumors don't tell the whole story.

Gold Stocks: The Hybrid Investment
The important thing to remember about gold stocks is that they represent hybrid investments. Like any equity, a portion of their returns will reflect traders' sentiments about the issuers' financial prospects, as well as its management team, the general equity market conditions and other idiosyncratic factors. The rest can be attributed to the market's disposition toward gold. Therefore, gold miners in essence serve two masters: the gold market and the stock market.

In the aggregate, 54 percent of the returns chalked up by gold stocks is "passive"; that is, directly ascribable to gold. Of course, the influence of gold upon individual issues varies, but that variance is vitally important in shaping investor expectations.

When selecting stocks, investors often look at an issue's MPT (modern portfolio theory) statistics, such as beta and alpha. Beta measures the variance in a stock's price history relative to a market benchmark; simply put, beta tells an investor how volatile that stock's price trajectory is likely to be. Alpha, on the other hand, represents the stock's return in excess of the market and of the risk-free yield on Treasury securities; alpha informs the investor how much excess return—positive or negative—has resulted from that stock's volatility differential in the past.

Investors can often find MPT statistics for individual stocks published by market newsletters or on Web-based financial platforms. Investors should know, however, that they're not getting the whole story about gold miners' risk from these figures.

The Problem With MPT
Here's the problem: Universally, the perspective taken by these analytics is from the vantage point of the general equity market. The stats measure a stock's risk compared, typically, to the blue-chip Standard & Poor's 500 Composite. But mining stocks are bound to look quite a bit different when compared with an index containing the likes of Bank of America and Boeing. Just look at the difference in returns over the past three years: Blue chips tracked by the S&P 500 have sunk at an average annual rate of 5.5 percent, while stocks comprising the NYSE Arca Gold Miners Index have risen 3.2 percent.

When you calculate the three-year MPT stats for the GDX exchange-traded fund, you're likely to find its beta as ".73" and its alpha as ".07." The beta figure says the fund's price tends to vary at 73 percent of the rate of the S&P 500. The alpha stat tells you the miners' fund cranks out a risk-adjusted annual gain that's 7 percent above that of the S&P benchmark. All that certainly makes the ETF look pretty attractive.

An investor who believes these figures represent the totality of GDX's risk, however, is bound to become disappointed. For one thing, the portfolio stats are backward-looking. They describe the fund's historic arc, but can't possibly guarantee future results.

More importantly, though, they only describe the risk embedded in gold mining stocks that's attributable to the equity market. Nothing's said about the other half—more than half—of the fund's exposure.

To get that side of the story, MPT stats need to be run against gold's price. For good measure, we'll run the stats for each GDX component that released earnings last month vs. gold, the stock's parent gold miners' index and the broader equity market:

While four of the miners look like winners when measured against large-cap issues, only three produce better risk-adjusted returns than the universe of senior gold stocks. Just one, however, actually outperforms gold itself.

The lesson that should be taken away from this is simple: When shopping for investments, statistics can't tell you everything, but the right statistics can certainly tell you more. (Courtesy: Hardassetsinvestor.com)