Re-Evaluating Gold Stocks for 2014
Purchasing gold stocks is one alternative method of introducing gold into an IRA. I want to take a look at what these stocks are and what factors into their prices, recap their recent performances and keep an eye to future prospects.
Given recent events in the Ukraine, news out of India as well as the monstrous purchases by the Chinese government, there appears to be some upward momentum for physical gold. Now seems as good a time as any to reevaluate gold stock.
What Are Gold Stocks?
Gold stocks are the shares of companies who are involved in the mining, production and/or exploration of gold. The largest of these companies have their shares listed on major gold stock indices, such as Gold Miners Index (GDX) or the BUGS Index (HUI).
There are hundreds of gold stocks to choose from – and many of these mine other metals along with gold. One of the primary advantages of owning stock in one of these companies (instead of physical gold, or bullion) is that gold stocks are easier to store. Additionally, gold stocks tend to be a double-edged sword for investors – as the price of the metal rises, the company can see even higher gains; if gold falls, some companies can lose value in excess of the gold’s decline.
These factors generally make gold stocks more risky than owning physical bullion.
A large number of these companies are in the five countries that lead the world in gold production: (in order) China, Australia, the United States, Russia and South Africa.
What Affects the Price of Gold Stocks?
For obvious reasons, the price of gold is the greatest determinant of the value of stocks on the precious metals indices. These companies obviously will realize greater profits and can expand operations when gold prices are high. When times are poor, such as in 2013, companies will slow construction and new production in order to relax costs.
The economic conditions of the region where gold is mined can have a major impact on gold stock prices. Because the price of gold is sensitive to interest rates (lower interest rates will reduce the returns on other investments, making gold more attractive), gold stocks share a similar inverse relationship with rate increases or decreases. Businesses can also be restricted by regulations and local input costs, such as energy.
Of course, the overall health and management of the underlying business is a powerful determinant for any stock. Those companies which performed best in 2013 successfully adjusted their labor costs and reigned in exploration expenses. Low-cost mines are much better prepared to survive drops in the price of gold.
Gold Stocks in 2013
2013 was an unforgiving year for gold mining companies, who saw an even greater drop in value than GLD. This performance is typical of gold stocks; when gold drops, stocks of mining companies drop even further. Whereas gold took a 28 percent haircut in 2013, GDX fell by more than 50 percent!
However, the converse is also true. Gold stocks have the ability to rise faster than gold when it appreciates. In investing terms, this is known as a “levered effect” – they are a more volatile version of investing in the physical commodity.
Part of the decline of gold stocks in 2013 was because of market gains elsewhere. Investors who realized capital gains need to sell off under-performing assets, like gold stocks, to balance out their portfolio for their taxes (tax-loss selling). This only steepened the drop.
Top 3 Gold Stocks for 2014
Silver Wheaton Corp. (SLW) Not having a revenue stream that has been dominated by gold is one of the primary advantages of Silver Wheaton; it is well diversified in other precious metals. The company especially has excellent prospects for silver and copper (and they have several long-term purchase agreements in place for non-gold mines), so they were able to absorb some of the negativity of 2013 and shift assets as it became necessary.
Royal Gold Inc. (RGLD) Royal Gold (and all of its subsidiaries) are primarily focused on acquiring precious metals royalties in politically stable environments, primarily in the Americas and West Africa. The company will often finance the development of projects in exchange for royalty interests. Scheduled dividend payments from Royal Gold for 2014 (thus far) are up 5 percent from the same time period last year.
Goldcorp Inc. (GG) One of two largest gold corporations (by market value), Goldcorp does it all: exploration, development, mining, operations and acquisition. Goldcorp has been able to post larger-than-anticipated earnings by successfully mitigating expenses to navigate the past 12-16 months. Goldcorp isn’t exactly a radical pick – they have been an industry leader for some time – but sometimes you don’t have to search very far to find value.
Not surprisingly, gold stocks might see brighter days if gold rallies this year. There are some companies that are particularly well positioned to realize gains, at least on the surface. However, precious metals bullion still holds several important advantages over stocks in precious metals companies. Here is a quick rundown:
- Mining and exploration companies are subject to increased regulations and taxes, changes in input costs, etc.
- The value of physical metals will never hit zero – companies can declare bankruptcy or close shop.
- In dramatic circumstances, such as systemic collapse, real gold will hold value that stocks simply can't replicate
In short, gold bullion is a safer investment than gold stocks. For a thorough analysis, click here!
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