12/17/2013 8:15 PM ET|
Can gold miners dig out of bottomless pit?
Mining stocks are down 50% on the year and still falling as tax-loss selling adds insult to injury. But patient investors could eventually be rewarded.
Many major gold companies have lost at least half their value this year after a more than 25 percent plunge in gold prices, but analysts aren't convinced that miners have hit bottom -- and tax-loss selling may further the declines.
The Philadelphia Gold and Silver Index (XAU) has lost 50 percent year to date and the NYSE Arca Gold Bugs Index (HUI) has declined 56 percent. Shares of Barrick Gold (ABX), the world's largest gold-mining company, have dropped by 51 percent this year.
Among exchanged-traded funds, the Market Vectors Gold Miners (GDX), which provides exposure to publicly-traded companies involved primarily in gold mining, sank this month to its lowest level in about five years. It's down 55 percent this year.
The losses for the gold miners aren't much of a surprise given the hefty declines in gold prices, which are poised to log their first loss in 13 years. But shares of the gold miners have suffered a drop that's roughly double the year's price loss for the metal.
"Gold stocks have actually been underperforming gold since the 2008 credit crisis," said Brien Lundin, editor of Gold Newsletter.
"That's because the U.S. and global economies have bounced from crisis to crisis," he said. "And "in times of great financial uncertainty, investors buy gold as insurance and don't want to take on the added risk of paper equities."
But as gold prices and mining shares lost favor, U.S. stocks gained. The S&P 500 Index ($INX) has climbed 25 percent this year.
"Many investors have large gains in their portfolios because domestic stocks have excelled," said Malcolm Gissen, co-manager of the Encompass Fund (ENCPX). "With markets near all-time highs, some investors are balancing portfolios and realizing significant capital gains."
And "what in their portfolios have declined to offset the gains? Gold stocks," said Gissen. "The miners are suffering largely because of tax-loss selling."
Not yet a bargain
Still, given the plunge in so-called paper gold, investors can't help but wonder whether it's a bargain now. It isn't -- at least, not yet, according to some analysts.
"Gold gurus and actively-managed gold mutual funds have been pounding the table all year saying gold was near a bottom and we should be buying, especially the gold stocks," said Gissen. "They have been wrong." (Read what analysts were saying in May about gold and silver mining shares.)
Gissen said The Encompass Fund and investment advisor Malcolm H. Gissen & Associates, which he founded, sold almost all gold stocks early this year and "have not bought a single gold stock in 2013."
He said "2014 will also be a difficult year for gold and gold stocks, and it is unlikely we will be a buyer."
At some point the Federal Reserve will start to taper its bond-buying program and then at some point in the next 2 to 3 years, he expects gold prices to rise and the gold stocks to soar -- "the fundamentals are too strong for this to not happen."
"If an investor has a strong stomach and patience, he could buy a number of gold stocks in here, hold them for 3 to 5 years, and would likely make a lot of money," he said, but "what investors have patience anymore?"
So for now, analysts were reluctant to say miners have hit bottom.
"There's really no bottom in sight right now, unfortunately, and there are a lot better opportunities in other areas of the markets at this point," said Adam Koos, president of Libertas Wealth Management Group.
"Bullish percent for mining equities currently sits at 14 percent and falling -- meaning that only 14 percent of all mining stocks are on a buy signal" versus 86 percent on a sell signal, he said.
But there were a few suggestions for potential winners among the miners in the new year.
"The survivors in the (mining) spacer are going to be the companies with solid balance sheets, meaning they are not levered and who can deliver on guidance at a decreasing cost metric in the current environment," said Jeffrey Wright, managing director at H.C. Wainwright LLC.
He believes the winners in relative terms "have been or are in the process of adjusting the reigning in labor, material and exploration expenses while either increasing production or meeting guidance targets." He favors silver over gold in the near-to-medium term because of the potential for a more robust U.S. economic recovery.
And going into 2014, Wright likes small cap companies such as Great Panther Silver (GPL) which has multiple silver and gold mines in Mexico with a low-cost satellite mine going into production early in the new year. The company has a large cash balance and no debt, he said, while Comstock Mining (LODE) has a gold and silver open pit mine in Nevada and should surpass guidance for 2013. He doesn't hold any positions in those stocks.
As for Gissen, even though his firms sold almost all gold stocks early this year, he said investors with patience should be buying producers with growing production and lots of resources.
Among the larger producers, those would be Goldcorp (GG) and Yamana Gold (AUY) which look undervalued and should be expanding production over the next few years, said Gissen, who owns stock in the companies he mentioned.
Cary Pinkowski, chief executive officer of gold miner Astur Gold (ATRGF), said he would encourage buying quality gold producers like Osisko Mining (OSKFF) which has "life of mine energy costs locked in." He also pointed out that Angico Eagle Mines (AEM) just hit another record quarter of production. The company has "held up very well and these are usually the first to turn."
"When you buy in markets like this, expect them to go lower but when they turn, these stocks can really move to the upside," Pinkowski said.
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Not so very long ago everyone was touting the glowing future of gold mining stocks. At the time I personally doubted such hype because mineral stocks of all kinds like oil are fraught with middlemen who skim off the cream before investors ever see a penny. If you are going to invest in any kind of mineral you want to have the real thing in your possession where you can control its sale and distribution. For the heavy metals you want ingots. For coal and oil you want to own the fields where it is being harvested and be in a position to supervise and manage its harvesting.
The very minute that you turn your holding over to a supposed manager to manage and control it for you, you open yourself up to being had. I know because I have been there and done that. Crooks abound and it is hard to prosecute them because once you surrender control it is very hard to prove that they are defaruding you. Personally I would never invest in any sort of mineral stocks from the top to the bottom of them. When all you own is a piece of paper its worth is dependent entirely upon what those who control the asset say it is and you cannot prove otherwise without a lot of very expensive detective work. It just isn't worth it.
"Did you know that at one time it was illegal to own gold? It is true and it will likely be true again."
Bastions and bandwagons, my friend. Every major investment is extremely exploited. When it comes to metals, we'll endure a barren time where the giant hoarders strangle the little guys with thresholds for transacting. Since the amounts will make or break people, expect Chaos. Stocks are fully bogus... so they just fall apart. Real estate is okay but as that bandwagon full of wanna-be landlords tips over, expect volatility. A reminder that "old" has it all but "young" chooses what it will and won't buy, thus establishing true valuation.
The best thing the Fed could do at 2 tomorrow is to call austerity a failure and not just end QE, but to trash it and send wealth scrambling. We've been stagnant too long.
The low information investors that can`t pick stocks go for gold.Most of the time gold bugs lose
their money.Isn`t gold down like 30% this year?
The way I see it, our most critical problem, right now, today, is that we have lost control of 'our' government to a self-serving corrupt Bureaucracy, and we better find the 'will' ASAP to [take] it back. Sure, you can buy silver or gold and put it under your pillow for the rainy day, but if its at the point where you count your coins or feed your belly... And what's worse, what if two-hundred of you want that one tomato left on the vine. Don't wait till it gets that bad!
Would you rather sacrifice your lives for a tomato, or for the possibility 'we' the people can turn this Country around once 'we' the people regain control of 'our' government?
Anything including the Stock Market that has the power to do great harm against U.S. should be heavily regulated, shackled, or broken down so that it should never harm U.S. again.
Too bad the grandparents did not live a little longer; they would have said "see I told you so." Look it happened again! Tangible assets is what help them through the last depression. They likened stocks to gambling meaning the house always wins in the long run and the chips are worthless.
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