Gold Stocks: Finally Time To Go All In?

| January 22, 2014 | 0 Comments

mine helmetsSo far, 2014 is starting off on the right (albeit boring) foot for gold investors.  The yellow metal has meandered higher over the past few weeks, hitting the $1,250 an ounce mark in yesterday’s trading session.

Hardly exciting news, I know.

But what’s happening with mining stocks is a different story…

For the first time in years, gold miners are outperforming gold- by a long shot. 

Take a look…

Gold

As you can see, gold stocks are on fire in recent trading.  Since the start of the year, the Market Vectors Gold Miners ETF (GDX) has surged just over 7.5% (red line).  On the other hand, gold has only rose a sleepy 1.5% (blue line). 

As you may know, GDX holds a slew of gold mining companies including Barrick Gold (ABX), Goldcorp (GG), and Newmont Mining (NEM).

Why are miners rocketing while gold is essentially stuck in neutral?

As I’ve stated many times in the past few months, miners are undeniably cheap.  Thanks to a vicious multi-year downdraft, shares of most gold mining companies are trading at valuations not seen since the 2008 financial crisis.

Of course, that has bargain hunters coming out in droves.  What’s more, value investors are even more excited now that gold has put in a positive multi-week performance.

So is it safe for you to jump into this beaten down sector?

Yes…

… But with a few caveats.

Any bullish bets on miners should be relatively small at this point. 

After all, I’m still not convinced gold has put in a long-term bottom.  Even though the metal is trading at or slightly below the all-in cost of production for most miners, there’s still a good possibility of further downside.

You see, with the US economy gaining traction, the Federal Reserve will likely reduce stimulus measures even more in the near future.  As you may remember, the Fed is reducing bond and mortgage backed security purchases by $10 billion this month.

Upon the next tapering announcement, I wouldn’t be surprised to see gold drop back below $1,200.

So if you’re going to add gold stocks to your portfolio- do it slowly.

And if miners drop along with gold, don’t be afraid to add a bit more to your bullish long-term position.

Speaking of your position…

The best way to play a long-term rebound in the mining sector is through the aforementioned GDX, or its little brother the Market Vectors Junior Gold Miners ETF (GDXJ).  These ETFs are a great way to alleviate much of the inherent risk of owning individual gold stocks. 

You see, by owning a basket of companies instead of a single stock, you’re not exposed to the potentially devastating downside of a wrong turn by management.

So there you have it folks…

It’s officially time to start nibbling at gold stocks. 

And before I forget, if you’re looking for another way to invest in gold, stay tuned for future issues of Commodity Trading Research where I’ll be discussing gold and silver coin investing!

Until Next Time,

Justin Bennett

Tags: , ,

Category: Gold, Precious Metals

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.