Tana Goldfields News: What Will Happen To Gold Stocks In 2013? | Bubble News
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News: What Will Happen To Gold Stocks In 2013? | Bubble news Bubble news - The year 2012 is almost in the books; it was a brutal time for gold miners like Iamgold (NYSE:IAG) who've seen their share prices crater while gold actually increased in value. There's a serious disconnect between the two and it's questionable whether this will change anytime soon. As we head into 2013, I'll have a look at what I expect will happen to gold stocks in 2013. | INVESTOPEDIA By: http:// www.bubblews.com/news/939657-tana-goldfields-news-what-will-happen-to-gold-stoc ks-in-2013
Tana Goldfields News: What Will Happen To Gold Stocks In 2013? | Bubble News
1. Bubble news - The year 2012 is almost in the books; it was a
brutal time for gold miners like Iamgold (NYSE:IAG) who've seen
their share prices crater while gold actually increased in value.
There's a serious disconnect between the two and it's questionable
whether this will change anytime soon. As we head into 2013, I'll
have a look at what I expect will happen to gold stocks in 2013. |
INVESTOPEDIA By:
http://www.bubblews.com/news/939657-tana-goldfields-news-what-will-happen-to-
gold-stocks-in-2013
2. Rising Costs. The big problem for gold miners is that they
have to get the gold out of the ground; the cost to do so keeps
rising. Barrick's (NYSE:ABX) Pascua- Lama project on the border of
Chile and Argentina is full of hope and promise, yet it has been
hit by rising labor costs and much uncertainty. According to Pav
Jordan of the The Globe And Mail, the cost to develop Barrick's
mine was estimated at $8.5 billion in November. Only four months
earlier it was $500 million less. That's a 6.3% increase. With the
opening not expected until the summer of 2014, development costs
could easily rise to $10 billion by then. That's one of the reasons
why Barrick fired its CEO Aaron Regent in June. Costs were getting
out of hand. Unfortunately, for gold miners in general, it's a
pretty standard occurrence industry-wide. According to a Canadian
bank, the all-in cost to produce an ounce of gold is $1,500. Even
worse, gold miners need the price of gold to remain at or above
$1,700 for a sustainable amount of time in order to profit from
their mining. Given the price of gold is currently around that
number, it doesn't leave a lot of wiggle room for investors. In the
past five years, Barrick's stock has lost ground while the price of
gold has increased by approximately 120%. While it might have 17.9
million ounces of gold reserves at the one mine alone, if the cost
to get it out of the ground keeps rising, only a sustained run in
gold prices will allow it to sufficiently profit from those
reserves. Therefore, the economic argument for investing in gold
miners doesn't appear sound.
3. Exchange Traded Funds. One of the big reasons for the price
of gold rising in recent years is the introduction of exchange
traded funds (ETFs) like the SPDR Gold Shares (ARCA:GLD) and the
iShares Gold Trust (ARCA:IAU), which allow investors to own gold
bullion more easily. Prior to ETFs, most people would buy the
stocks of big producers like Barrick and Iamgold benefiting
indirectly from the rising price of gold. When gold prices
increased the share price of gold producers tended to follow suit.
Now, because investors are creating increased demand for these
commodity ETFs, it's putting upward pressure on the price of gold.
The big problem with what's happening is that investors are no
longer buying an asset that's uncorrelated with equities. It used
to be if you were worried about the performance of stocks, you'd
invest in gold as the ultimate hedge.
4. Since 2009, the price of gold and the S&P 500 have moved
almost in lock-step with each other. Therefore, an argument can be
made to own the S&P 500 exclusively, eliminating any need for a
discussion about gold. Poor Capital Allocation. At a recent
conference in London, BlackRock's (NYSE:BLK) chief investment
officer for natural resources, Evy Hambro, was highly critical of
the big gold mining companies. Hambro feels they've done a very
poor job investing shareholder capital. Since 2006, gold miners
have increased their share count by 40% without increasing volume
or margins. That means they've been spending billions on
exploration with no additional returns to speak of. In addition,
Hambro wonders why gold firms payout just 25% of profits as
dividends when oil companies are up around 45%. At one time the
average gold miner's stock traded at a forward P/E of 30 to 35
compared to 15 for global equities. Today, gold miners trade for
less than global equities. Exhibiting very little financial
discipline, it makes it hard for investors to justify an investment
in the producers themselves.
5. The Bottom Line. While it's clear the valuation of gold
stocks like Barrick are incredibly low on a historical basis, I
still have to wonder if it's worth placing a bet. Many analysts
feel it's only a matter of time before gold stocks participate in
the growing popularity of the commodity itself. I'm not so sure. I
subscribe to the Warren Buffett theory about gold that says it
serves no useful purpose besides looking pretty. Eventually, people
will get bored of looking at it. And even if the price keeps
rising, there's no guarantee producers will be able to profit from
the increase. Therefore, I don't hold out much hope for a rally in
gold stocks in 2013. However, if you must place a bet, I'd do so
with an ETF like the iShares MSCI Global Gold Miners Fund
(NYSE:RING), which is reasonably diversified with 47 holdings
including Barrick and is the least expensive of its ETF peers at an
annual expense ratio at 0.39%.