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MINYANVILLE ORIGINAL It is no secret that the second quarter of 2012 is proving to be a tough one for gold. After climbing 4% in the first quarter, the SPDR Gold Shares ETF (GLD ) is now up only 0.5% (to May 17) after briefly moving into negative territory, as bullion has continued its decline since late February.

Still, in its first-quarter Gold Demand Trends report released on Thursday, the World Gold Council reports that investment demand was the only sector of the gold market to register year-on-year growth in Q1, led by solid demand for ETFs and similar products. Indeed, the WGC reports inflows of 51.4 tonnes into the sector, with a value of $2.8 billion.

Earlier this year, Bloomberg reported that holdings of physical gold in ETFs have more than tripled in the last five years to 2,390.5 metric tons, at a value of around $137 billion. In February, Peter Miller, BMO Capital Markets’ head of equity capital markets in Canada, told Bloomberg that gold ETFs have been a huge hoover of capital and competition for the gold companies.

Metals ETFs have also had a disappointing 2012, with the SPDR Metals and Mining ETF (XME ) down more than 16% year-to-date, falling to its lowest level since last October earlier this month. Similarly, the Market Vectors Gold Miners ETF (GDX ) is down 19% in 2012, while its junior counterpart, the Market Vectors Junior Gold Miners ETF (GDXJ ) has fallen more than 24%. In terms of the stocks themselves, Newmont Mining (NEM ) is down 24% this year, while Goldcorp (GG ) has fallen 21%.

So, with both physical bullion and miners moving lower so far in 2012, does it pay to hold a gold ETF over a mining stock?

If you’re going to play in this field, I think you should stay with the gold itself because you know, the gold miners don’t really outperform on the way up and on the way down, they fell even worse, says Donald Selkin, chief market strategist at National Securities.

Relative to the miners, Selkin says gold is less volatile. For example, while gold has tumbled 20% from its September 2011 high, Newmont Mining for example, has fallen 38% from its November high. Longer-term, he says, the gold ETF has completely outperformed individual equities such as Newmont and Barrick Gold (ABX ), acting as a better hedge than the mining companies.

You look at ABX, Newmont Mining, two of the bigger gold mining companies, they’re down from five years ago. Gold has basically doubled in the last five years. So, certainly I don’t see the advantage of owning those gold mining stocks, he says.

Canadian hedge fund manager Albert Friedberg recently said, as reported by the Globe and Mail, that institutional investors are preferring to trade bullion-linked ETFs, and gold stocks no longer carry the premium multiples they used to.

Miners, says Selkin, can miss production targets, be subject to strikes, accidents and have their profits eaten up by cost inflation. While they have the capacity to pay a dividend, it is not enough to help offset declines, he adds.

At the same time, Tom Winmill, Manager of the Midas Fund recently told Minyanville that looking at the gold price relative to the pricing of the miners, valuations are attractive for gold mining equities at the moment. Many miners, he said, are well managed, with diverse, global portfolios and are selling for valuations not seen since 2008.

As the miners continue to lag gold, the ounces in the ground thats owned by these miners becomes so much cheaper than the gold that you can buy on the market through ETFs or jewelry. So, we think that maybe investors will see that valuation disconnect and purchase more mining shares instead of gold, Joung Park, a mining equity analyst at Morningstar recently explained on Morningstar.co.uk.

Ultimately, says Selkin, there is also another interesting issue at play for gold this year – that the metal seems to be giving up its safe haven status, as it is declining along with the euro.

Gold has relinquished its function as a fiat currency, as a safe haven, and as I said, it was during that currency panic and turmoil of last year that it hit its all-time high and look at it now, its like its kind of giving up the ship, so to speak, he says.