Are Depressed Gold Prices an Opportunity in Gold Stocks?

Last week’s slide in gold prices is a tricky dilemma for potential investors of gold stocks

The volatile trading over the past two weeks claimed many victims, but perhaps the most surprising of which was gold. In theory, gold prices should rise in times of fear and uncertainty, as gold is long considered an unofficial barometer of economic health. And the current dynamics are chock full of fear and uncertainty.

Gold prices

Yet the traditional safe-haven asset was cut down last week, losing 2% of value since Aug. 24 and causing gold stocks and gold miners to tumble as well.

The precious metals selloff couldn’t have come at a worse time. Prior to the recent series of red ink, gold prices skyrocketed nearly 7% for the month of August — on pace for the best monthly performance in years.

Unfortunately for commodity speculators and gold investors, the momentum could not be maintained, despite the real possibility of the U.S. Federal Reserve delaying its promised interest rate hike.

Despite the setback, the issue is far more complicated than a simple rout of the precious metals. For one thing, several prominent analysts have been calling for gold prices to drop below the psychologically critical $1,000 level, yet this bearish forecast hasn’t been realized.

A strange circumstance indeed, considering that this year, all three major equity indices — S&P 500, Dow Jones Industrial Average, Nasdaq Composite — achieved all-time nominal records. In addition, the commodities sector as a whole was on the receiving end of a bloody beat-down. If gold prices were to implode, this year would have been it.

The fact that the precious metals are still holding on is an encouraging sign, but future implications for gold stocks and gold miners can vary on a number of factors. Find out which metals-based investment has the best chance for profitability.

Market Vectors Gold Miners ETF

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A cursory look at the heavily traded Market Vectors Gold Miners ETF (GDX) is enough to reveal that 2015 has not been kind to the precious metals producers. Year-to-date, the popular exchange-traded fund is knee-deep in the red by 22.5%, the steepest loss among the gold stocks featured in this article.

Most of the losses were incurred over the past four months, with the gold miners fund free falling by 30% since the beginning of May. In sharp contrast, spot gold prices given up less than 4% of value over the same time frame.

However, proponents of the gold miners will emphasize the high-risk, high-reward nature of this kind of investment — in other words, to the victor goes the spoils! While the rally in gold prices in the first half of August was notable, the run-up in the gold miners GDX fund was far more remarkable — more than 19% of profitability.

The main problem for everyday investors is that the gold miners fund lacks any pretense of technical stability. Despite the extreme bearishness the GDX and the mining complex has endured since 2011, it continues to dubiously set new record lows, with the most recent one occurring just a few days ago on Aug. 26. This worryingly suggests that the selloff is not quite over for the gold miners.

Yes, there are extraordinary profits to be made in the GDX, but only if you can time the markets correctly. Otherwise, the current volatile fundamentals renders this gold miners fund inappropriate for most investors.

Royal Gold, Inc.

RGLD, stock chart
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Individual gold stocks haven’t fared well at all in recent trading, and Royal Gold, Inc. (RGLD) is no exception. So far, the mining company has lost a hair under 22% YTD, just barely trailing behind the volatile GDX ETF.

In addition, Royal Gold has significant business interests in multiple emerging market nations that have been crushed under the sharp correction in the commodities sector.

Fundamentally, investors have been scared off by rising expenses relative to revenue, leading to generally declining net income levels. This is also reflected in the fact that for fiscal year 2015, Royal Gold has failed to meet earnings expectations in each of the four reporting quarters. Fourth quarter FY2015 results were particularly disheartening, with positive revisions ahead of the announcement leading some to forecast an earnings beat, only to be disappointed later with a negative surprise of 17% — the steepest in six quarters.

The technical perspective, however, is where RGLD truly fails to inspire confidence. Like many other gold stocks, RGLD has been trading inside a consistently negative trend channel since late January of this year. While it hasn’t made all-time lows, RGLD stock’s price action has been very choppy recently, and there’s little evidence to suggest the present bearishness will abate any time soon.

Even for gold stocks, RGLD is simply too wild for most investors’ palates.

SPDR Gold Trust

Gold prices, technical chart
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Forget esoteric topics like Fibonacci retracements or Elliot Wave patterns. People buy gold much for the same reason they buy insurance — you never know what tomorrow might bring.

The substantially increased volume in the popular SPDR Gold Trust (GLD) is a testament to the primal concerns that many investors have towards the global economy. No matter how much the mainstream media downplays it, gold is still very much considered a safe-haven asset.

But is now the right time to get in? The precious metals complex has been among the worst underperforming assets for the past three years, with gold prices absorbing a 40% haircut since peaking in 2011. Worse yet, the upper range of the bearish trend channel in the metals has rarely been challenged, and when it has, the challenge has never lasted that long.

However, there are signs that a reversal may be on the horizon. The rate of decline in average annual gold prices has significantly slowed in the last three years, moving from  a loss of 17.3% in 2013 to losing 4.7% so far this year. Bucking the trend in gold stocks, the GLD did not make a new low in August, thereby maintaining an inclining trading channel for the month.

Although gold prices have been under a mountain of pressure, the yellow metal has held up well. Considering the broad ugliness in the world economy, a conservative investment in gold and the GLD may turn out to be a prudent choice.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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