Gold mining companies have not had it very well lately. Investor favorite Goldcorp’s (NYSE: GG) stock was trading at $13.84 a share on 6 September 2017.
It is easy to see why, Goldcorp posted a net income of $465 million on June 30, 2017, ycharts data indicates. Disturbingly that was better than the rest of the industry. On the same day its’ American rival, Newmont Mining (NYSE: NEM) reported a loss of -$479 million. Royal Gold (NASDAQ: RGLD) was doing a little better with an income of $101.53 million on the same day.
Although one major producer, Barrick Gold (NYSE: ABX) did report a net income of $2.363 billion on 30 June 2017. Despite that performance, Barrick only managed to reach a share price of $17.83 on September 6, 2017.
Are Gold Miners a Value Investment?
These numbers will have many people wondering if gold miners have become a value investment.
Gold miners are not a value investment because of the all the threats and potential threats to them right now. The precious metal mining business is on shaky ground that will cave in sometime in the near future. Smart investors would be advised to stay away from gold miners for now.
Major Threats to Gold Miners Include:
This is the biggest menace to gold mining and it is one that a lot of traditional investors cannot see coming. Altcoins like Bitcoin, Ethereum, Litecoin, NEO, and DASH serve as a hedge against inflation. Yet they are far easier to buy, sell and trade than gold.
You cannot take gold coins down to Kroger or Aldi and buy food for your family with them. Nor can you use gold coins to fill the tank at your neighborhood gas station.
A person can use a Bitcoin Visa from Bitpay to purchase food for the family or fill the tank at the convenience store. A company called Shakepay offers a Visa that works with DASH and Ethereum as well as Bitcoin. Uquid is offering Ethereum and Litecoin Visas. If that was not enough a company called TenX claims its’ Visa shipping this month will work with eight different cryptocurrencies including DASH and Ethereum. TenX’s card is supposed to ship this month.
Get the picture folks, cryptocurrencies are easier to buy than gold (you can purchase them at any time with a credit card), easier to sell and they can be spent at retail stores. More importantly, cryptocurrency values are exploding right now. On September 2, 2017, bitcoin was trading $4,648 a unit; a 68.66% increase since the month before, Ethereum was trading at $354.61 a 58.66% increase over the previous month, and Litecoin was selling for $77.09 a unit, which was an 81.35% over 2 August 2017, Coinbase.com data indicated.
The major reason why people buy gold is that they don’t trust government paper money. Well, now there’s a better, cheaper and more versatile alternative out there. Bitcoin has already replaced gold as the hedge of choice in China, and might soon do the same in India. It is easy to see why Forbes proclaimed Bitcoin “The New Gold.”
- Falling Oil Prices
Anybody that lives in mining country, as I do, or watches Gold Rush on The History Channel knows that diesel fuel is one of the biggest expenses at a modern mine. Diesel is the big expense because today’s miners dig with power shovels instead of picks and shovels and haul the ore or dirt in dump trucks.
Falling oil prices lower the cost of diesel fuel which makes mining cheaper. When mining gets cheaper; people dig more ore, which lowers the price of gold.
A long-term menace to gold prices is electric vehicles which might make mining even cheaper. Cummins just unveiled an electric semi-truck, and it is only a matter of time before electric bulldozers and power shovels enter the market. Electricity costs far less than diesel fuel and miners can produce their own via hydroelectric, solar and wind turbines.
- The Price of Gold
A major problem here is that the price of gold is still high enough for miners to make a lot of money by digging large amounts of it. APMEX reported that gold was fetching $1,327.30 an ounce, $42.67 a gram and $42,673.65 a kilo on 2 September 2, 2017. At those prices, miners would still make a lot of money digging a high volume of the metal even if gold dropped by $500 an ounce.
Slightly higher prices like the ones we have seen lately make the situation worse, by giving miners an incentive to ramp up production. Something that many investors forget is that gold mines do not make money by hoarding gold – they earn a profit by selling gold.
A related problem is that lower fuel prices make it easier to enter the mining business. If diesel fuel is cheap, anybody with a bulldozer or a power shovel and a valid claim can start digging. The situation is far worse in developing nations like Peru, where miners simply ignore the law and dig wherever they want.
This leads to more gold on the market, at a time when demand for the metal is falling. That will lead to lower prices but give miners a reason to increase production because they will need to sell more gold to cover costs.
- Economic Volatility
The dangerous conventional wisdom is that economic volatility raises demand and prices for precious metals by undermining faith in fiat currencies. For example, gold and cryptocurrency prices rise whenever there is a war scare.
Such price increases are rarely permanent because they are driven by fear. The fear is often based on the hype created by some journalists’ efforts to attract extra hits to a website with a sensational headline. When the fear dissipates or the danger is exposed as media hype, the price falls again.
Instead of rising gold prices, economic vitality often undermines them. That rarely affects gold miners because the fear based hype usually does not last long enough to permanently boost prices.
Such volatility can lower gold and stock prices by sparking panic sales. It also sows distrust in the market which lowers long-term demand.
Recent hysteria over war with North Korea, Donald J. Trump, and Brexit is a prime example of this. Some of the fears are valid, but they are blown all out of proportion by the media.
These four circumstances make the price of gold unstable, which makes the market for gold miners’ product inherently unstable. This makes gold mining companies far from a value investment.