Are Gold Mining Stocks a Good Investment?

By Rob Pietropaolo (Private Client Trader)

Short-term traders often find trading gold mining stocks fun because of their extreme volatility. Long-term investors in gold mining stocks have only felt pain. Staying away from gold is not a new concept in the investment world, but if you’re one of those people looking at the gold price thinking “Wow look how low the gold price is…” I’m going to tell you that if you think this is a buying opportunity, you are probably in for a nasty surprise.

Why gold mining stocks suck as an investment choice

In 2013 alone, US gold mining companies tumbled 50% as the gold price fell to $1240 an ounce. A scary fact considering that the only time gold mines outperformed gold was prior to 2006, and never since.

You see the problem investors experience is that when gold mines do give them a bit of upside when the gold price rises, they get seriously hit when the gold price falls.

Another reason for miners not benefiting from the lofty gold prices of $1900 an ounce, and under-performing gold, was the introduction of gold ETFs (Exchange traded funds).

These ETFs gave investors easy exposure to the rising price of gold. Gold mining firms also took on a huge amount of debt and spent it on expensive ‘long shot’ projects that mostly became unviable as the price of gold started its long decline.

Simply put, gold mining stocks under-performed in good gold-markets AND bad gold-markets.

Gold mines are cutting costs fast

Our gold producers are burdened with extremely high production & labour costs, and are among the world’s most expensive extractors of the metal.

It’s becoming increasingly more expensive for our miners to get the gold out of the ground as they have to drill deeper and deeper for the ‘precious’ ore.

The only way they’re able to deal with rising costs and declining metal prices is by cutting dividends, selling assets, halting work at higher-cost mines and reducing headcount, thus raising net present values but potentially causing some cash charges.

A bounce in the gold price may not help gold miners either

If you believe that gold is due for a relief rally, or bounce, or if you’re looking to take advantage of the September-November ‘gold buying season’, buying gold mines is probably the dumbest trade you can make.

A higher gold price does not automatically mean higher profits for our mines. There are many ways of profiting from the stock market. Sitting and hoping for a miraculous gold resurgence is not one of them.

You need to be proactive. Any investment that does not perform should not be in your portfolio. For Rob Pietropaolo’s full article go to tradeknowledge.co.za.