If you are invested in a gold miner, you may have taken some punishment possibly over the last year, and it may now be time to pull the plug and exit. Yes in recovery from the 2008 turmoil, 2009 provided a great year of gains for the gold miners. The gains continued in 2010, with growth throughout that year. Then in 2011, with the economic uncertainty, the Middle-Eastern Spring and the antics of PIIGS in Europe, the price of gold reached new highs of $1900 USD an ounce, yet the gold miners struggled. This is depicted in the two charts following:
The price of gold for the last three years in the above chart shows continued appreciation until a peak in September of 2011. Since then the gold price has been showing declining highs and declining interest.
The chart of the GDX miners above for the last three years shows the price appreciation in 2009 and 2011. Then in 2011, there was much volatility in sharp movements upward and downward. There were many opinions expressed as to why the miners were not showing price gains while the price of gold was still appreciating.
Whether the reasons were that the higher gold prices was not translating into profits, or that costs are also increasing or that the miner was encountering mining geological issues, the precious metals investor needs to wake up from the dogma of gold prices moving up forever and take action. Do not assume those gold mining equities as a whole will continue to rise, paralleling or leveraging the rise in the price of gold.
The interpretation of the above charts and the gold miners' performances is telling me do not expect further gains for the group as a whole. There is now a coming (or already started) shaking out of the pack or differentiation of miners, where the ones that perform well will be rewarded and the ones that under-perform will be punished.
Witness the punishment that the market is meting out to Kinross Gold (KGC) for over-rating the potential in the $7 Billion Redback acquisition, and where it is now writing down the material goodwill for the buy-out in 2010. Kinross dropped 21% or $3 Billion in market cap on that announcement.
This is not unusual and just similar to the regular main stock markets where the growing companies that execute on their business plans go upward in price, and the dogs are penalized severely. This should be interpreted by you the precious metals investor, as a maturity in the precious metals sector, and you should be positioning yourself accordingly.
As to what good gold mining stocks one should be picking up, well it all depends upon the individual stock now, and the stock's prospects for growth and the stock's management being able to execute on growth plans. Do not expect the sector to go up as a whole. Do not expect gold miners to leverage the gold price. The stock price appreciation will all depend upon the individual stock's prospects and management competence, as in how the general market rates other investment vehicles as a whole.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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