Was the recent sell-off in gold stocks a mistake? If you’re into crazy numbers like, oh … say Q1’s revenue or earnings, then yeah — the drubbing most of the mining stocks have taken over the past few weeks was unfair. On the other hand, if you’re worried that gold (the commodity) is going to make good on its recent threat of a breakdown, then shedding your gold mining names isn’t entirely hair-brained.
Clearly it’s a two-edged sword, but one that’s not too unwieldy to handle if you’re a current or prospective owner of these tickers. You just need the right information and perspective.
Here you go.
First Things First
We’ll dispense with the fluff and go straight into it: last quarter’s revenue and earnings from the major gold miners. They speak for themselves:
|Yamana Gold (AUY)||$0.20||$0.23||$0.25||$476.1M||$608.2M||$559.7M|
|Barrick Gold (ABX)||$1.00||$1.10||$1.09||$3.09B||$3.76B||$3.64B|
|Newmont Mining (NEM)||$1.03||$1.14||$1.15||$2.47B||$2.69B||$2.68B|
All in all, the numbers aren’t bad. Some beats, some shortfalls, but overall these companies came in on target. Remember, handicapping gold miners is doubly tricky because (1) mining is an imprecise art, and (2) these companies have no control over gold’s selling price. Either way, results were better all around.
Investors Worried Anyway
So if the results were so solid, why did the Market Vectors Gold Miners ETF (NYSE:GDX) give up nearly 19% during the past two months, right in front of earnings? There were a handful of contributing factors, but ultimately they all feed one fear — falling gold prices.
One of those threats that materialized in early April was a fairly hawkish Federal Reserve. Gold is widely viewed as a hedge against inflation, and not only has inflation been abated of late (falling from 3.87% in September to 2.65% for March), but the Fed indirectly suggested another round of inflation-spurring quantitative easing is hardly a foregone conclusion. (That anti-QE stance was slightly reeled in a few days ago.)
The other bearish driver for gold mining stocks was a presumed slacking of demand from China, and to a lesser degree, India. It wasn’t an entirely irrational premise. China’s growth rate really has been slowing, from 10% to something closer to 7%. And India cranked up duties and taxes on gold — imports as well as jewelry sales — to the point where the country’s entire gold industry came to a screeching halt.
Funny thing, though: While the world was certain gold-related companies were on their death bed, gold (the commodity) and its ETFs like the SPDR Gold Trust (NYSE:GLD) actually have held their ground while mining stocks have been pummeled.
So much for that theory.
How much lower can gold mining stocks go? Gene Arensberg says the mining names in the Gold Bugs index are priced as if gold is priced at $800 per ounce rather than the current $1,653 per ounce. Tocqueville Gold Fund manager John Hathaway said in a recent interview that “I don’t see a huge amount of downside risk. To me this is an excellent opportunity to put money to work in the sector, particularly in the gold stocks which are as cheap as I’ve ever seen them” (which is largely true). While Hathaway didn’t talk numbers, his idea — as well as Arensberg’s — is pretty clear: Mining stock prices don’t jive with gold prices.
Click to Enlarge Be that as it may, the support line (orange) that has been keeping gold’s uptrend alive since early 2009 still is intact. The bears are pretty persistent here, though, and gold itself has gotten uncomfortably comfortable under all of its long-term and intermediate-term averages. The India and China worries also could resurface without any notice.
Point being, the war might already have been lost, even if the final battle hasn’t been fought yet.
Yes, mining stocks already reflect a much lower gold price. It doesn’t matter — traders already have proven they’ll sell first and ask valuation questions later. If the floor lets gold under it, brace yourself for another round of gold miner selling. If instead gold makes its way back above all those moving averages and reaches $1,700, odds are good these mining stocks will rebound. Until one or the other happens, we’re in limbo.
Just for the record: I’m bearish on gold here and expecting that support line to break pretty soon. Mining stocks will follow that lead for a while.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.