Are The Gold Miners Finally A Buy?

By Aaron Levitt | November 05, 2013 AAA

It hasn’t been so much fun to be a precious metals investor this year. As the strengthening global economy has put many quantitative easing programs on hold, much of gold’s luster has diminished. Funds like the mammoth SPDR Gold Shares (NYSE:GLD) have fallen down towards new 52 week lows. Former gold bulls are now turning to bears and those firms that mine the precious metal have begun to report terrible earnings.

There have even been a few bankruptcies of smaller junior miners.

With so much “sourness” facing the gold sector, you have to wonder if there’s value to be had. After all, as the old investing adage goes “be greedy when others are fearful.” For investors, the beaten down gold miners may finally be becoming a buy.

A Straight Shot Down

The gold sector has been under pressure for much of 2013 as safe haven assets have been shunned in favor of high growth assets. So far this year, gold and its related funds- like the iShares Gold Trust (NYSE:IAU) -has plummeted roughly 22% and is heading for its first annual drop in price since 2000. Analysts estimate that it’ll get there as the pressures facing the metal seem to be continuing. Economic data continues to improve across Europe, the United States and the emerging world. Meanwhile, the dollar continues to ride. That doesn’t paint a rosy picture for those who did the metal out of the ground.

Mega-miner Barrick Gold’s (NYSE:ABX) recent earnings highlight the problems in the industry. The firm reported a 73% drop in earnings per share as well as the closure of its $3.45 billion Pascua-Lama project. The price of gold versus CAPEX costs simply don’t produce much profits for miners- even the low cost ones. Barrick’s results echoed rival miner Newmont’s (NYSE:NEM) quarterly drop in profits.

However, in all this carnage, the opportunities are beginning to present themselves.

According to analysts at the Royal Bank of Canada (NYSE:RY) all of this doom & gloom could be a great buying opportunity for medium and longer termed investors. One huge reason is that the gold futures and options markets are showing a “lack of vigor.” According to RBC that means that much of the negativity in the sector has already been priced in.

Secondly, there’s still plenty of geopolitical and economic tension in the world. The debt ceiling battle and government shutdown in the U.S. is one prime example. Meanwhile, war in the Middle East and Greece’s continuing debt issues are still in the forefront. Add in low inflationary pressures- which could result in more bond buying from the world’s central banks- and you have a recipe for higher gold prices in the near to medium term.

All of which means it’s time to buy the miners to play the rebound in these prices.

Getting Golden With Your Portfolio

With the mood in the gold sector now hitting its lows, investors may want to begin thinking about buying the miners. The proxy for the sector- the Market Vectors Gold Miners ETF (NYSE:GDX) has been roughly halved over the last 52 weeks. That drop could signal a buy in the heavily traded ETF.

However, while the Market Vectors fund is the largest ETF in the space, the iShares MSCI Global Gold Miners Fund (NYSE:RING) maybe better. RING undercuts GDX on fees- as well as other gold funds like PowerShares Global Gold & Precious Metals (NASDAQ:PSAU) -while providing exposure to roughly the same group of mega mining firms. The ETF tracks 38 different miners including Peruvian miner Buenaventura Mining (NYSE:BVN) and Canada’s Kinross Gold (NYSE:KGC). The fund's low expenses at 0.39% make it an ideal buy and hold investment in the sector, while the fund’s 52% drop over the last year makes it a bargain as well. Overall, RING could be the best buy and hold gold ETF.

For those investors looking for a bit more “oomph”, the junior miners could be a big buy. The risks are greater- as these smaller firms may not survive the rout in gold prices- but the rewards could be higher. Both the Global X Gold Explorers ETF (NASDAQ:GLDX) and Market Vectors Junior Gold Miners ETF (NASDAQ:GDXJ) offer exposure to the small fries. Given that both funds have been decimated over the last year, they could be bargains waiting to happen.

The Bottom Line

Over the last year, gold has gone from the asset du jour to the most hated thing on the planet. That dour attitude towards the precious metal could mean it’s time to buy. The previous picks in the mining sector are a great way to play the potential golden bargain in the industry.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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