With the Fed beginning to dial down its quantitative easing programs and economy finally moving in somewhat of a positive direction, gold prices have been on a one way ticket downwards. The precious metal experienced a 23% decline over last quarter to fall to just below $1200 an ounce. That was the worst quarterly decline since 1975. Funds like the physically-backed SPDR Gold Shares (NYSE:GLD) now sit at new 52-week lows.
Perhaps fairing worse than the metal itself has been those firms that dig it out of the ground.
The gold miners have imploded over the last few months as the price of the yellow metal has sunk. However, while it may tempting to bottom fish, the worst could still be ahead for the sector.
Below The Cost Of Production  
Gold bullion has fallen 10% since Fed Chairman Ben Bernanke last month said the economy was recovering strongly enough for the central bank to begin “tapering” its $85 billion monthly bond-buying stimulus this year. That hasn’t sat too well with the firms that mine precious metals nor their share prices.
SEE: What To Do About Gold Now

The industry benchmark fund- the Market Vectors Gold Miners ETF (NYSE:GDX) - is down nearly 50% year to date. Yet, there could be still more pain on the horizon.
That’s because the all-in cash cost for gold production is currently above what the precious metal is trading for. According to Citigroup (NYSE:C) a combination of rising costs- such as labor and energy inputs- sustained high CAPEX budgets, along with falling gold prices have resulted in a fast contraction in margins. Analysts now estimate that these factors will prevent any gold company in their coverage universe will generate free cash flow at current spot gold prices. This bearish forecast echoes similar predictions by analysts at Jeffries, in which that firm forecasts that the major miners are likely “to generate negative free cash flow over the next several years.”
Citigroup data shows that many of the largest mining firms are losing money with the yellow metal’s spot price below $1,300 an ounce. The all-in costs of production for companies such as Goldcorp (NYSE:GG), Barrick (NYSE:ABX), Newmont Mining (NYSE:NEM) and Yamana Gold (NYSE:AUY) are in the range of $1,400 to $1,600 an ounce. 

In the face of lowered price targets for gold, the miner’s costs continue to rise. Both electricity and diesel fuel continue to skyrocket, while wages for labor are reaching new highs. The latest sector-wide pay demands are for hikes ranging from 60% to 150%. Meanwhile, miners continue to unearth lower grade ores. These lower grade ores mean the companies have to dig up more land in order to produce the same amount of gold. That adds to the already high costs of production.
Taking A Dour Approach 
Given the potential headwinds facing the gold mining industry, a major shake-out could be brewing as several of the smaller and less-capitalized miners will have trouble keeping the lights on in this high cost/low bullion price world. If investors are tempted by the recent share price declines, then focusing on the larger miners like Barrick or Agnico Eagle (NYSE: AEM) may be warranted. However, with the conditions potentially lasting a few years or more, it might actually be more profitable to short shares of the mining firms.
The easiest way is through the Direxion Daily Gold Miners Bear 3X Shares (NASDAQ:DUST). The ETF uses future contracts and leverage to short the previously mentioned Market Vectors Gold Miners ETF. So far, DUST has surged and is up an astonishing 140% this past three months. While that is a huge gain, the fund could see more over the next few months as gold continues lower and costs rise at the miners. 

SEE: Leveraged ETFs: Are They Right For You?
Suffering worse than the big boys have been the junior miners. These small-fries are less capitalized than the larger mining firms like Barrick are the least likely to survive a continued gold price rout. While there is no dedicated short ETF that tracks the sector, investors shouldn’t have to any trouble shorting the highly liquid Market Vectors Junior Gold Miners ETF (NASDAQ:GDXJ)- which bets on basket of these firms.
The Bottom Line 
With gold’s recent price drop and lowered future price targets, the miners are in a world of hurt. Cash costs for the sector are now well above the breakeven point. With costs still rising, investors still have time to get short shares of the gold producers as the sector rout takes hold. The previous picks are great ways to do just that.

Related Articles
  1. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  5. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  6. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  7. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  8. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  9. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  10. Mutual Funds & ETFs

    Best 3 Vanguard Funds that Track the Top 500 Companies

    Discover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center