The Conversation (0)
Gold mining companies have had more in common with struggling S&P 500 than with the safe haven metal, though this may change in the near future.
Gold prices are crowding $1,800 an ounce in a long-term upward movement, but this has not yet been reflected in the performance of gold mining company stocks. In fact, following the recent downturn on many major markets, the miners have probably had more in common with struggling S&P 500 companies than with the safe haven metal, though this may change in the near future.
“This is a record divergence between the mining equities – especially between the major producers – and the underlying metal. I think that’s a short-term apparition may be a rare opportunity,” said Jeb Handwerger, editor of Gold Stock Trades. “If you’re looking for value and you’re looking for exposure to precious metals, buying gold right now is not a value play. It’s a momentum play, it’s over-extended, and it’s over-bought.”
For the first four months of 2011, both gold mining stocks and the spot price of the metal followed a similar pattern. This changed in May when the value of gold took off due to concerns of a global economic crisis.
However, things were a little rockier for gold mining companies. For example, this year Barrick Gold Corporation’s (TSX:ABX) stock peaked at $55.63 back on April 20, but dropped to a low of $43.04 on June 24. Today, it is once again around the $50 mark and though it might take time before gold mining stocks catch up, if the price keeps going the way it has been, companies should start seeing a rise before too long.
“We may see miners ‘take the ball and run with it’ because even at $1500-1600 an ounce gold, it hasn’t been reflected in the prices and equities, though we began seeing that a little bit the past couple of weeks,” said Handwerger. “The miners have been so beaten down and they’re so cheap it’s a value play. Now the opportunity is in the under-valued miners. We’ve seen a huge increase in volatility, but once the markets start settling down, I think we may see that catch-up coming into the fall season.”
Much of the recent volatility in stock markets is attributed to the S&P downgrading the United States’ credit rating, sending investors looking for a place to keep their assets safe in an uncertain environment. Gold has once again stepped up to fulfil its historic role as a hedge against inflation, and reliable mining companies may soon follow suit.
“It’s tough times for a lot of investors. It’s so volatile and it’s so hard to distinguish between what is and what isn’t a true safe haven. I believe that mining equities in friendly jurisdictions that have increasing ore bodies are transferring fiat currency into resources and valuable mineral wealth for their investors, and this can provide leverage to the price of precious metals,” said Handwerger. “Sometimes the precious metals lag, but at the end stages they can make up gains that are phenomenal.”
Handwerger says he sees some of the greatest value will come from lower-grade operations that were not profitable at previous gold prices, but are now able to be competitive in light of the current stellar performance.
“There is more potential for gain going from something that had no value to something that has significant value, compared to something that did have value to an increased value,” said Handwerger.
Handwerger explained that investors looking to get the best value from gold mining stocks should look to companies producing in favourable geopolitical regions, and though the majors can provide a more stable investment, there are many opportunities in the juniors for those willing to do the research.
“I think there should be exposure to the producing mines in everyone’s portfolio. That’s important to have because they’re really producing a lot of cash and they’re really in a position of strength,” said Handwerger. “If you go on to carefully selected juniors I think there is going to be an increase in mergers and acquisitions this year, I think the miners that are sitting on massive amounts of cash with diminishing reserves are going to pick up these high quality juniors.”
