Gold Stocks: Is The Collapse Finally Over?

| June 3, 2013 | 0 Comments

goldSomething very interesting is happening…

For the first time since last summer, the average gold stock is actually rising along with the price of gold.

You see, except for a multi-week rally where both gold and gold stocks rose in July 2012, miners have solidly underperformed the yellow metal for years.  In fact, even when gold rose to record nominal highs near $1,900 an ounce in late 2011, gold miners were essentially stuck in the mud.

And now that the price of gold has officially fallen out of bed over the past two months, well, it’s been downright ugly for the average gold stock.

Take a look…

GDX vs. Gold

As you can see, anyone bullish of gold stocks went for a stomach-churning ride since mid-2012.  And even though gold is still priced 54% higher than it was five years ago, the average gold stock is down 40% in the same time frame.

Why such poor performance for gold miners?

It all comes down to production costs.  

Expenses related to gold exploration are soaring.   The rising costs of labor, equipment, and raw materials are making mining an extremely costly endeavor.  And the higher costs go for miners, the less money that flows through to their bottom line.

According to Bloomberg, the average cash cost of the 10 biggest gold miners was $694 in Q3 2012.  That’s 50% higher than in the same period two years ago.   No wonder gold miners have underperformed gold!

But that underperformance could be coming to an end…

Now that share prices for miners have dropped so sharply in 2013, the market has likely discounted much of these rising costs. 

What’s more, mining company insiders are purchasing shares of their own companies on the open market at an alarming pace.  In fact, the ratio of insider buying to selling is running about 10 to 1 over the past few weeks.  In other words, for every insider that’s selling, 10 are buying.

And as you may know, insiders know their companies better than anyone.  And there’s only one reason they buy- to make money in the long run.

Does this mean the bottom is in for gold miners?

Without question, the average investor has grown to hate the gold mining industry. 

But with bearish sentiment approaching multi-year highs, now may be a good time for contrarian investors to throw caution to the wind and buy into this industry.

Of course, the wildcard here is the price of gold… 

If the yellow metal continues its recent downward spiral, miners are guaranteed to follow suit. 

However, if gold can rise from the recent lows at $1,350, there’s a good chance patient investors will be rewarded with miners down the road.

One of the easiest ways to capitalize on the rising share price of gold miners is through the Market Vectors Gold Miners ETF (GDX).

Until Next Time,

Justin Bennett

*** Editor’s Note***  The first trade in my new service, the Commodity Profit Hunter, went out last week.  If you’d like to discover how to capitalize on short-term gyrations in important commodities like gold, silver, oil, natural gas, and corn, make sure you check out the Commodity Profit Hunter today!

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.