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U.S. Gold Mining Stocks Continue to Disappoint But Not For Long.

August 15th, 2012 · Chris Vermeulen · 4 Comments

It is an endless debate for investors interested in gold. Should they buy a direct play on the gold price, either gold bullion itself or even so-called paper gold with an ETF such as the SPDR Gold Shares (NYSEArca: GLD)? Or should they invest into gold equities, particularly the larger, higher quality gold mining companies?

Recent history suggests the answer is gold itself. According to Citigroup, physical gold has outperformed global gold equities 120% percent of the time over the past 5 years. Stocks of the bigger gold mining firms seem to react adversely to bad news (which is normal), but the problem is they react with no more than a yawn to good news. These type of stocks are contained in the Market Vectors Gold Miners ETF (NYSEArca: GDX).

Gold Mining Stocks ETF - GDXGold Mining Stocks ETF – GDX

Evidence of this trend can been see in the latest news to hit the industry…the slowdown in expansion as recently signaled by the world’s largest gold producer, Barrick Gold (NYSE: ABX). The company’s stock has fallen by more than 30 percent over the last year due to cost overruns at major projects. The latest blowup in costs of up to $3 billion occurred in its estimate for development of its flagship Pascua-Lama project on the border of Chile and Argentina. The project may now cost up to $8 billion.

In addition, Barrick decided to shelve the $6 billion Cerro Casale in Chile and the $6.7 billion Donlin Gold project in Alaska. Barrick is not alone in its thinking among the major gold producers. The CEO of Agnico-Eagle Mines (NYSE: AEM), Sean Boyd, recently said “The era of gold mega-projects may be fading. The industry is moving into an era of cash flow generation, yields and capital discipline.”

Fair enough. But are gold mining companies’ management walking the walk about yields or just talking the talk? Last year, many of the larger miners made major announcements that they would be focusing on boosting their dividends to shareholders in attempt to attract new stockholders away from exchange traded vehicles such as GLD, which have siphoned demand away from gold equities. Barrick, for example, did boost its dividend payout by a quarter from the previous level. Newmont Mining (NYSE: NEM), which has also cut back on expansion plans, has pledged to link its dividend payout to the price of gold bullion.

So in effect, the managements at the bigger gold mining companies (which are having difficulties growing) are trying to move away from attracting growth-only investors to enticing investors that may be interested in high dividend yields. This is a logical move.

But rising costs at mining projects may put a crimp into the plans of gold mining companies’ as they may not have the cash to raise dividends much. And they have done a poor job of raising dividends for their shareholders to date. In 2011 the dividend yields for gold producers globally was less than half the average for the mining sector as a whole at a mere 1.3 percent. Their yields are below that of the base metal mining sector and the energy sector.

It seems like management for these precious metal companies have the similar emotional response shareholders have when they are in a winning position. When the investor’s brain has experienced a winning streak and is happy it automatically goes into preservation/protection mode. What does this mean? It means management is going to tight up their spending to stay cash rich as they do not want to give back the gains during a time of increased uncertainty. Smaller bets/investments are what the investor’s brain is hard wired to do which is not always the right thing to do…

Looks like there is still a lot work to be done by gold mining companies’ to improve returns to their shareholders. But with all that set aside it is important to realize that when physical gold truly starts another major rally. These gold stocks will outperform the price of gold bullion drastically for first few months.

Gold Stock Rally


Gold Miner Trading Conclusion:

In short, last weeks special report on gold about how gold has been forming a major launch pad for higher prices over the past year. Gold bullion has held up well while gold miner stocks have given up over 30% of their gains. If/when gold starts another rally I do feel gold miner stocks will be the main play for quick big gains during the first month or two of a breakout. The increased price in gold could and value of the mining companies reserves could be enough to get management to start paying their investors a decent dividend which in turn would fuel gold miner shares higher.

Both gold and silver bullion prices remain in a down trend on the daily chart but are trying to form a base to rally from which may start any day now. Keep your eye on precious metals going into year end.

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4 responses so far ↓

  • 1 Greg Atkinson // Aug 20, 2012 at 9:04 am

    Maybe the gold mining stocks are signalling the end of the gold bull market? Could it be that gold is about enter a cyclical decline?

  • 2 Stillgotshoeson // Aug 20, 2012 at 9:37 am

    Greg Atkinson // Aug 20, 2012 at 9:04 am

    Could it be that gold is about enter a cyclical decline?

    Yes it could, but I don’t think so. A short term blip before the next run up I think is more the case.

  • 3 Greg Atkinson // Aug 21, 2012 at 10:55 am

    I read that George Soros added to his gold holdings last quarter so I wonder if he making a long term or short term play? He did say once that gold was the ultimate asset bubble so it does make me curious about why he bought more.

  • 4 Plornt // Aug 22, 2012 at 9:31 am

    Greg not sure about the positions of Soros. It might be short term, but we can never be sure. We do know in 2011 he dumped 800m of gold. In 2011 13f revealed: “Soros, who has been bullish on gold in the past several years, cut his holdings in the SPDR Gold Trust to just $6.9 million by the end of first quarter, compared with $655 million in December 2010, becoming the most high-profile investors to turn his back on one of the market’s best-performing assets.”
    He now only has 884,400 shares in GLD, with a current value of ~140 million. Thus to me it only appears he has 10-20% of his position size on, and he is averaging in over time. If he has strong convictions about golds direction one would of thought he would be running a position size at least somewhat close to the unloaded amount in 2011.

    Looks like Gold has finally broken out of triangulation to the upside. We need to close 30 TD above the upper resistance – now support – before we get too excited. My system is saying this will ultimately fail, but we can never be sure, so I want to re-enter shorts near max draw to give a margin of safety given almost all the systems are hitting max draw right now.

    DR Copper Massive Head and Shoulders ? That can’t be good for the risk trade, and global economic growth if the neckline breaks.

    All my drivel is not meant to act as any form of financial or investment advice. All site visitors are urged to do their own research and/or seek assistance from a reputable investment adviser before making any investment related decisions.

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