Should gold mining stocks be a part of your investment portfolio in 2014? Find out in this edition of Rogue Capitalists Daily…
We’ve recently talked about how gold has become a pariah to many investors over the last year. Its downfall has been short and spectacular. I lost track of how many money managers and talking heads cited gold as their worst pick for 2014. We think just the opposite.
In fact, indicators showed gold speculation, by way of futures contracts, had dropped to lows not seen since 2006. You can check that tidbit out in our Chart of the Day: “Gold Drops As Speculation Dries Up.”
But even as the hating continues, gold has showed us that it isn’t dead. In fact, it’s done exactly what we expected and hoped it would do. Gold prices have successfully retested the $1,200 low, formed a base and moved up from there.
You can see from the above chart that the $1,200 price point is now a serious support level now that it’s been tested and modestly come back up.
There are a number of factors that must be taken into account with gold… and also how you can profit from gold mining stocks.
What to Consider When Looking at Gold Mining Stocks
On the demand side, we must factor in limited gold jewelry production, Indian importing, government hoarding (everyone from India, Russia, China and even the Swiss) and the expectation that gold is an inflation hedge.
On the supply side, there is a significant overcapacity across the globe as gold miners rushed to build production to deliver on $1,600 gold. Additionally, we have production costs that are running anywhere from $900, on the extremely low side, to $1,300, on the high side.
The net effect of these price crunches is that the expensive supply, gold costing $1,300 or more per ounce, will be taken offline until prices improve. Demand will remain stable, but without the speculation. Finally, global governments will continue to add to their gold positions as hedges against the U.S. dollar and our low interest rate policies.
Countries such as Russia and China will go even further, as they are trying to encourage the use of their currencies as new global reserve currencies. To do this, they need large gold supplies.
The outlook for gold over 2014 is good, if not a bit boring. Gold should climb up, but modestly. For investors looking to round out their asset-allocated portfolios and perhaps even pick up a bargain or two, now is one of the best times in years to be looking at gold mining stocks.
My Three Best Gold Mining Stocks
As always, my gold recommendations are centered around productive gold assets instead of unproductive physical metal. So now that the herd is ignoring gold and trashing its producers, let’s take a look at two of the best-in-breed stocks on my short list.
I believe that Randgold Resources Ltd. (NASDAQ:GOLD) is one of the strongest of the large gold mining stocks. There are Goldcorp and Barrick Gold Corp., both good, strong companies, but Randgold has a better grasp on its margins and operations.
Like many of the biggest gold miners, Randgold has the ability to use its size and leverage to pick up cheap gold mining assets and capitalize on marginal mines, as well as the financial ability to shut down or slow production at its plants.
There have already been some buyouts and consolidations in the mining sector, but more small miners with expensive production costs and low margins could be forced into the arms of these large players.
Take a look at the chart for GOLD below. This gold mining stock has taken an ugly nosedive. Consider that this stock was sitting at over $124 in the fall of 2012. That’s a significant haircut.
This gold mining company pays a marginal dividend of 0.8%, but that should improve as gold prices do. It’ll pay you to wait, unlike that pile of gold coins in your basement.
Alamos Gold Inc. (TSE:AGI) has a large majority of its production in our neighbor to the south, Mexico. This gold mining company has a healthy balance sheet, and while smaller than Randgold, it has the financial stability to weather price choppiness.
It too could potentially pick up some undervalued gold mines with its cash hoard. The stock pays out a 1.6% dividend and is moderately priced.
Alamos wasn’t a highflier in the last few years, but it hasn’t fallen as much, either. Last year, the stock hit highs around $20 per share.
Both of these gold mining companies have good margins and are skilled at keeping their production costs down. This will be the defining characteristic that will make or break many miners over the next year. Those that have it will prosper and survive, while those that struggle will see their equity and stock prices crumble.
If you’re still on the fence about an individual gold miner, consider the Market Vectors Gold Miners ETF (NYSE:GDX). It allows you to take advantage of the sector movements without being exposed to a specific company or region.
There are some who prefer the Market Vectors Junior Gold Miners ETF (NYSE:GDXJ), which focuses on the smaller companies. However, in this circumstance, I’d say, stick to the big guys.
While I’m normally a fan of small- and even micro-cap companies, this isn’t going to be the environment for them to be successful as a group. Stay away from the junior miners, as they will have a tougher time restraining costs and keeping their operations profitable. This is not to say that there won’t be the occasional hero like Detour Gold. It’s just that, as a group, they present much more risk than their better-funded, higher-efficiency and much larger brethren.
To be sure, gold’s ride isn’t going to be smooth. Barring any new financial crisis at home or abroad, and without any other economic calamity, we could see gold trend sideways for a good part of the year. Either way, while gold is down, it’s a great time to add some to your portfolio and round out your asset allocation.
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