When it comes to precious metal investing, there’s a long-running debate: the metal or the miners?
As the price of gold has tumbled, gold mining stocks have been utterly eviscerated. Market Vectors Gold Miners ETF (NYSEARCA:GDX) dropped over 3% on Friday, while the spot price of gold fell only about 2%. Market Vectors Gold Miners ETF (NYSEARCA:GDX) owns 30 of the biggest gold mining stocks; its largest holdings are Goldcorp Inc. (USA) (NYSE:GG), Barrick Gold Corporation (USA) (NYSE:ABX), and Newmont Mining Corp (NYSE:NEM).
Some major market participants have warned investors to avoid the miners, reasoning that there’s simply too much at risk. Investors interested in the gold space should consider heeding their arguments.
Gold miners are liars
In a recent interview with Business Insider, famed commodity guru, Jim Rogers, channeled his inner Mark Twain, quoting the legendary author who once characterized gold mines as a “hole in the ground with a liar standing at the top.”
Rogers has long been an outspoken gold bull, arguing the merits of the metal on the grounds of central bank policy. Rogers, who ran the Quantum Fund with George Soros, is fiercely anti-Federal Reserve, and believes that the Fed’s current policies are likely to lead to economic ruin.
Interestingly, Rogers actually predicted gold’s correction, but still believes in the metal over the longer term. However, he doesn’t believe in the miners:
“30 years ago if you wanted to buy gold, you were almost restricted to gold mining shares. That’s not true anymore… So the miners have a serious competitive situation and of course there’s hundreds of them.”
You have to be insane to own gold miners
Eclectica’s Hugh Hendry made 50% during the collapse in 2008. He’s flipped his position on the actual metal several times, but hasn’t cared for the miners. In an interview with The Economist, he said it was “insane” to own gold mining stocks.
Even if one is bullish on the metal, Hendry argues that owning the mining stocks exposes one to unnecessary risks. Unfortunately, gold mines tend to be located in geopolitically uncertain regions.
Case in point, consider what’s happened to the South African gold miners over the last several months. AngloGold Ashanti Limited (ADR) (NYSE:AU) has been devastated by periodic labor strikes, and shares have tumbled over 60% in the last year. For comparison, the aforementioned Market Vectors Gold Mining ETF has performed lousy over the last year, but not nearly as bad — it’s lost just 47%.
Unfortunately for his investors, hedge fund magnate, John Paulson, has had a big stake in AngloGold Ashanti Limited (ADR) (NYSE:AU), going so far as to praise the company at an Ira Sohn investment conference in May 2012. Back then, Paulson noted that it was trading at a discount to its peers and paying a solid dividend. Evidently, he didn’t factor in labor strikes.
The situation in South Africa’s mining industry remains uncertain, and analysts at Societe Generale downgraded AngloGold Ashanti to “sell” back in June. As Paulson noted, AngloGold Ashanti Limited (ADR) (NYSE:AU) is attractive on the basis of its production costs. Last quarter, it cost the company about $900 to produce an ounce of gold — far below the industry average, estimated to be around $1,100. Unlike other miners, as long as gold’s price remains above $900 an ounce, AngloGold Ashanti Limited (ADR) (NYSE:AU) could remain profitable.
All things considered, AngloGold Ashanti Limited (ADR) (NYSE:AU) would be a great company to own, if it wasn’t struggling with its workers.
Alternatives to the miners
As Rogers noted in his Business Insider interview, for those bullish on gold, there are many alternatives to owning gold miners. Besides buying the precious metal directly, or holding a position in it through the futures market, investors can turn to a gold ETF.
The SPDR Gold Trust (ETF) (NYSEMKT:GLD) is the largest gold ETF. Although it has a 0.40% fee, it has tracked the price of gold fairly well. Over the last year, it’s down about 23%, while the spot price of gold is down about 22.80%.
A share of SPDR Gold Trust (ETF) (NYSEMKT:GLD) represents the right to a portion of gold stored in a vault in London, so the value of the ETF is tied directly to gold’s spot price. If gold rallies, SPDR Gold Trust (ETF) (NYSEMKT:GLD) should perform well. A number of major hedge funds have invested in SPDR Gold Trust (ETF) (NYSEMKT:GLD) in recent years. Both Paulson’s fund and Dan Loeb’s Third Point held stakes in SPDR Gold Trust (ETF) (NYSEMKT:GLD) at the end of March.
Given gold’s recent performance, it’s hard to be bullish on the yellow metal, but long-term trends still seem to be in gold’s favor. Continued money printing by the world’s central banks should support the gold price. Although the Fed may be considering tapering its asset purchases, other banks (like the Bank of Japan) continue to be aggressive. Dennis Gartman went bullish on gold late last week, in light of Japan’s ongoing easing.
The gold mining ETF
While SPDR Gold Trust (ETF) (NYSEMKT:GLD) is the big gold ETF, the aforementioned Market Vectors Gold Miners ETF (NYSEARCA:GDX) is the major gold mining one. If investors disagree with Rogers and Hendry, Market Vectors Gold Miners ETF (NYSEARCA:GDX) is an easy way to invest in the sector. Unfortunately, its expense ratio is 0.52%, but owning a basket of 30 mining stocks might be better than buying the stock of just one or two mining companies.
As with AngloGold Ashanti Limited (ADR) (NYSE:AU)’s labor troubles, individual miners can face various headwinds, irrespective of gold’s price. With Market Vectors Gold Miners ETF (NYSEARCA:GDX), you get 30, providing a level of insulation against external shocks. David Einhorn’s Greenlight Capital had a stake in Market Vectors Gold Miners ETF (NYSEARCA:GDX) as of March.
Playing gold
Despite gold’s recent selloff, many remain believers. But, perhaps bullish investors should consider playing the metal directly, using an ETF like GLD, rather than through the miners.
Although the inherent leverage in gold mining can lead to outsized gains during a bull market, the losses can be just as brutal during a correction. Moreover, owning a gold miner can leave one vulnerable to risks beyond just a gold price correction — just ask AngloGold Ashanti’s shareholders.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Stay Away From Gold Miners originally appeared on Fool.com is written by Salvatore “Sam” Mattera.
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