I have long been a fan of holding gold (NYSEARCA:GLD) over the gold miners (NYSEARCA:GDX) as a means of gaining exposure to the precious metal. This largely stems from my belief that gold is a store of value, and that the miners are simply a derivative of a store of value. Additionally, an investor in the miners has to worry about things such as the costs of mining, profits, labor issues, and dealing with governments. Those are all thing I prefer to avoid.
Last year, however, as Newmont Mining (NYSE:NEM) dipped into the low $40s on three different occasions, I built a small position (a couple of percentage points of my total gold exposure). I did so not as a call on Newmont's business, but instead because I think its enhanced dividend policy can turn the company's stock into a leveraged play on gold. Since I pay storage costs on my precious metals holdings that fluctuate with the prices of those metals, Newmont's gold-price-linked dividend policy is something to which I wanted a bit of exposure.
Besides owning Newmont Mining, I have only traded gold miners on a couple of occasions. But there comes a point when an industry has been so beaten up that when one combines the power of selling covered calls with extreme oversold conditions, there is an opportunity for investors to make money. I think that opportunity has now arrived in the gold miners. Additionally, as someone who follows the senior bonds of various gold miners, I am quite surprised by how well they've held up during the recent massive selloff in the equities. I have wanted to get my hands on Barrick Gold's (NYSE:ABX) and Kinross Gold's (NYSE:KGC) long-term senior bonds and have been following them quite closely during the equities selloff. The offer prices on those bonds have barely budged and are still over 100 cents on the dollar (Kinross Gold's is well over par). I own the senior bonds of AngloGold Ashanti (NYSE:AU) and Newmont Mining and they too have held up remarkably well.
I give a lot of credence to what bondholders think. The bonds have held up so well, and the selloff in the equities has been so brutal that I decided it was time to buy the miners. I chose to do so by buying Barrick Gold this afternoon. For some investors interested in getting long the miners, it may be more suitable to buy the Market Vectors Gold Miners ETF. I am taking the chance on a single miner because I think enough of the concerns regarding Barrick Gold's issues with the Pascua-Lama mine and the possibility for medium-term lower gold prices are now built into the stock. Barrick's stock is close but not quite at its bear market low from 2008 ($17.27), and I do recognize that major support levels such as the 2008 low can act as a magnet for a stock. But I am comfortable jumping in now because I can sell covered calls, over an extended period of time if need be, to cushion any further declines.
When equities go through the type of margin selling and industry-wide brutal selloffs we've seen in the miners, an investor catching those falling knives will often need a strong stomach while watching the volatility in the shares. This is especially true because an investor is unlikely to catch the exact bottom in a plunging stock (as I doubt I have). But assuming the business is not in danger of going away (as I believe Barrick Gold's is not), a bottom will eventually be found. The trick is making sure you've bought at a price that is close enough to the bottom that you can make money on the upswing.
Margin-induced selling, which I think the miners are experiencing, makes it difficult to rely on "cheap" looking valuations and fundamentals when catching a falling knife. Instead, I like to use a combination of technical analysis and time. Give the margin clerks time to force people out of their positions (it's been happening for several days now), and make sure you are buying close enough to a major support level (the 2008 low in this case) that you can use the stock's option chain to protect yourself if it turns out you were wrong to buy. I am reasonably confident I have waited long enough and purchased Barrick Gold close enough to a major support level that I can afford to wait for the dust to settle and the fundamental-focused investors to begin to step in. I've been waiting a long time to say this: It's time to buy some gold miners.
Additional disclosure: I am long gold. I am also long AU and NEM bonds.