Just consider these returns for the gold mining stocks:
- Shares of NEM stock have fallen 60% from their late-2011 peak.
- FCX stock has fallen from a price near $60 in early 2011 to a low of $27 hit just this June.
- ABX stock has lost nearly 70% of its value since around this time of the year in 2011.
What gives? Simply put, mining stocks are losing ground because gold — the commodity — has lost a ton of its value during that time. In fact, some gold miners are actually digging the stuff up at a cost that’s greater than gold’s current selling price.
They’re willing to do so on hopes of remaining operational (and solvent) until gold prices improve enough to make the gold mining business viable again.
That may be a lost cause, however. Gold mining stocks look bad for a somewhat complex but inescapable reason.
Gold Mining Stocks Face Rising Costs
It almost seems like a cruel joke. Gold mining became an amazingly profitable business on the heels of gold’s rise to a price of nearly $2,000 per ounce in September of 2011. Then, expenses for gold miners began to rise as well, crimping the long-awaited high margins the industry had been waiting on for years. And, of course, hurting gold stocks.
In 2011, for example, NEM only paid a total (average) of $929 to dig up one ounce of gold. AngloGold Ashanti Limited (AU) reported it was paying a total of around $1,200 per ounce for gold mining. FCX also was spending about the same to mine gold. That figure well up from 2010 costs, which were well up from 2009 cost per ounce.
Still, gold was priced near $2,000 per ounce at the time and was expected to go nowhere but up. So even at a typical all-in cost of $1,250 per ounce, there was still plenty of profit cushion. That made gold mining stocks like NEM, FCX and ABX must-haves for any portfolio. Then it happened.
Gold prices fell, but gold mining costs didn’t. By the middle of 2013, gold prices had fallen as low as $1,186 per ounce … less than many gold miners were shelling out to mine it. Gold prices have recovered somewhat to a price around $1,300. But that’s still above what some miners are paying to dig it up, and even the most efficient gold mining stocks are struggling to maintain acceptable margins.
And until gold prices can reach the right level, there are very few — if any — gold stocks worth owning.
Problem: None of the factors that tend to force gold prices higher (boosting margins for gold miners such as NEM, FCX, and ABX) are anywhere near ready to do the job.
Outlook for Gold Mining Stocks
Though nothing pushes the price of gold up or down as much as speculative thinking does, that thinking is largely fueled by four things:
- Interpretations of the strength of the U.S. dollar
- Inflationary pressures (or lack thereof)
- Interest rates
- Gold’s supply and demand
None of those factors currently point to higher gold prices … and that’s bad news for gold stocks.
As of the last look, the annualized inflation rate in the U.S. was a mere 1.18% [vs. a long-term norm around 2.8%], and has been broadly falling for months. The U.S. dollar index is right where it was in 2007, where it has roughly remained the whole time. And interest rates on 10-year government bonds, though up a bit from their multiyear low of 1.5% seen in the middle of last year, are still near multiyear lows at their current level of 2.6%.
Plus, according to the World Gold Council, the second quarter’s net consumption and purchasing of gold was the weakest it’s been in years, topping off a fairly steady decline in consumption since the peak from the third quarter in 2011. With nothing in place to counter any of those trends, gold is in no position to stage a rebound … and neither are gold stocks.
Indeed, with the U.S. economy remaining weak yet an end to the Federal Reserve’s cash-infusing, $85 billion per-month bond-purchase program on the horizon, inflation and interest rates may actually be poised to continue dropping.
That in itself may result in further deterioration in actual consumption. It’s a slippery slope to say the least.
The bottom line is, gold mining stocks look bad, and will for a while.
Gold miners — and by extension gold mining stocks like ABX, FCX, and NEM — are facing an enormous headwind thanks to weak gold prices and systemic weakness in the normal catalysts that would normally buoy gold stocks.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.