Fool's Gold Report: Gold Prices Fall Again, But Will Barrick's New Pay Policy Change the Industry?

Coming into Tuesday, investors had hoped that gold prices would take the opportunity to add to their gains from the first quarter, despite a more recent downturn that has sent gold more than $100 down from its recent highs. Yet gold started the second quarter on a down note, leading to declines for SPDR Gold Shares (GLD 0.34%) even as Market Vectors Gold Miners (GDX 0.60%) and most mining stocks inched higher. Some of the most interesting news came from Barrick Gold (GOLD 1.68%), which announced a new compensation policy that it claims could revolutionize the industry.

How metals moved today
June gold futures dropped $3.80 per ounce to $1,280, which resulted in a 0.2% drop for SPDR Gold Shares. Daily share volume for SPDR Gold Shares was well below average levels, suggesting a lack of trading interest in the yellow metal that likely added to the malaise in gold prices. May silver fell more than $0.06 per ounce to $19.69, but platinum and palladium prices gained on the day.

Source: Kitco. As of market close.

Image sources: Wikimedia Commons; Creative Commons/Armin Kubelbeck.

In the run-up to earnings season for the bulk of the stock market, gold investors are left trading on economic data, and lately, readings on the recovery have been reasonably strong. Without any impetus for the Federal Reserve to change its general direction on monetary policy, ETFs like SPDR Gold Trust will have a tough time bouncing back from their recent setbacks, and gold prices will struggle to regain levels from earlier in 2014.

For investors in mining stocks, though, it's becoming clear that efforts to keep costs in line are just as important as changes in bullion prices, if not more so. Barrick's new initiative to redefine its executive compensation practices comes in the aftermath of years of problematic relations between shareholders and executives. One key component of the new policy involves paying executives with convertible units based on a scorecard of various factors, including return on invested capital, dividends, and free cash flow. Controversially, the converted shares aren't eligible for sale until an executive retires or leaves the company. Some investors worry that the restrictions will give talented executives an incentive to quit early in order to reap the rewards of their performance, but others argue that vesting requirements should provide enough penalties to stay the course.

Whether Barrick's initiative is effective depends largely on how valuable the incentives its executives earn turn out to be. If the stock can't rebound, then all the equity-linked incentives in the world won't provide stronger performance. By contrast, awarding incentives at a time when the industry arguably can only go up is also dangerous in its own way. It'll be interesting to see how shareholders respond in the long run to Barrick's moves.

More broadly, though, mining-stock investors need to keep executive compensation and other costs in check in order to preserve cash and expand margins. Otherwise, the tough pricing environment for bullion could sink earnings and create further losses for shareholders.