Over the past ten years the price of gold has risen tremendously, buoyed by new methods of access, regional shifts in supply and demand and new regulation. In recent months, however, the yellow metal has seen more volatility than it has in the previous 30 years, this quarter the gold price is set for its biggest drop since 1920. Many investors have viewed the sudden price crash as an opportunity to buy, while others see it as a natural correction as a bubble bursts and real interest rates increase.

For those that wish to seek exposure to gold there is a lot of choice about how to do so – be it physical (bars, coins etc.), exchange traded funds, gold derivatives such as options or gold mining equities. This choice is made more complicated by the fact that the price of gold mining equities has been dislocated from the wider price of gold.

When the price of gold hit its height of over $1,900 per troy ounce in 2011, the valuations of miners remained subdued. This has been a long-term trend - from 1984-2012 the Philadelphia Gold and Silver Miners Index rose by 46 per cent yet the gold price rose by 343 per cent over the same period. So why is there such a large divergence?

One of the chief reasons for the dislocation is the fundamental difference in risk/rewards for equity and commodity markets. For example, miners are subject to operational risk, with the chance of accidents, cost overruns, political intervention and general mismanagement priced into the equity value. For gold mining companies in particular, cost risk is also a fundamental issue, with declining resources and rising prices encouraging the mining of ore that is more costly to extract. Furthermore, building new mines is a time consuming and risky process, requiring careful management of governmental relationships, local communities and possible environmental issues. These risks are not an issue when using other methods of gaining exposure to gold, such as ETFs or buying physical gold.

When mining companies are not building new mines, they have undertaken high-risk M&A transactions. Historically, gold miners have used times of plenty to increase their capital expenditure instead of paying larger dividends, in order to offset declining production. The creep of CAPEX is viewed by investors as a substantial risk, with the market reacting negatively due to a series of high profile failed and costly deals.

The dislocation is also a reflection of the fact that the different methods of accessing gold exposure have very different investor bases that have reacted differently as the market has changed. Since 2000 there has been a large shift to investment as a source of demand for gold and correspondingly a great deal of innovation in how institutional and private investors gain exposure. In the past, a gold investor had few choices – taking physical delivery of bars or coins, or investing in gold mining stocks. With the advent of the first gold ETF, investors were given a new method of gaining exposure that negates many of the risks and costs associated with mining stocks.

While some of the investment demand for gold mining stocks has now been removed and relocated to ETFs, the use of these vehicles has changed pricing in different ways. are often speculating on the spot gold price, whereas investors in gold miners are typically more interested in dividends and company cash flows, using the long-term gold price. As a result, the valuations of gold miners will typically move more in line with the longer end of the gold forward curve, which is less volatile than the spot price.

So, will this dislocation ever end? There is a persuasive argument to suggest that there will soon be a reversion to mean due to changes in the gold mining industry.

Over recent years the gold mining industry has done much to improve its operating efficiency. In the past gold miners may have been plagued by disastrous expenditures that have had little positive result; however, there are signs that the industry has learned from this.