Are Gold and Gold-Mining Stocks Really Doomed?

The current price of gold tells us that “yes, gold and gold mining stocks” are doomed. Mr. Market has spoken and basically doomed gold, and perhaps the gold mining industry, to the death spiral.

The gold price in U.S. dollars at the close of trading on July 17, 2015, was $1,132.80 for a troy ounce, the lowest it has been since 2010 but not necessarily that bad. Gold prices are still far better than they were back in 2005, when prices were in the toilet; gold was trading at $425 a troy ounce on July 22, 2005.

What concerns observers is not the current price of gold but the steady erosion in gold prices, which is similar to what happened after the last bull market in gold back in the 1980s. The yellow metal was trading at $1,660 a troy ounce as recently as January 25, 2013, or about two and a half years ago. Since then, it has lost around $500 an ounce in value, and that loss has been fairly steady.

A Major Slump for Gold

Gold appears to be in the middle of a major slump that is accelerating. Such slumps are usually self-perpetuating because they have two effects upon behavior. First, they discourage new investors and new money from entering the market, and second, they encourage those in the market to dump their gold.

Persons familiar with gold will see history repeating itself here; Macrotrends.net estimated that the highest price gold ever fetched was $2,079.33 an ounce in modern money in January 1980. That high price was the beginning of a long decline in gold prices that continued until April 2001, when gold hit its ultimate low of $351.39 an ounce.

Gold started regaining its value and nearly regained it by rising to a high of $1,921.73 in August 2011. The pattern of that bull market was eerily similar to that in the 1980s; the difference was that gold did not rise as high as it did in the 1980s.

The logical conclusion we need to make here is that we are at the beginning of a long-term slump in gold. The combination of low interest rates and high stock market returns is taking all the luster out of the gold market, and it is not likely to return any time soon.

Carnage in the Gold Mining Industry

Naturally, many investors will be wondering what the effect upon gold mining stocks has been. As you might expect, the results have not been very pretty. The numbers show gold mining is an industry in deep, dark trouble.

Revealing data from the major gold miners includes the following:

• Goldcorp (NYSE: GG) reported a revenue growth rate of 29.97%, a net income of -$2.346 billion, a profit margin of -8.55%, a free cash flow of -$361 million and a return on equity of -12.66% on March 31, 2015.

 

• AngloGold Ashanti (NYSE: AU) reported a year to year revenue growth rate of -17.51%, a net income of -$98 million, a profit margin of -.09%, a free cash flow of $22 million and a return on equity of -3.31% on March 31, 2015.

 

• Newmont Mining (NYSE: NEM) reported a revenue growth rate of 8.1%, a net income of $483 million, a profit margin of 3.77%, a free cash flow of $116 million and a return on equity of 4.59% on June 30, 2015.

 

• Barrick Gold (NYSE: ABX) reported a revenue growth rate of -15.19%, a net income -$2.938 billion, a profit margin of 2.54%, a free cash flow of -$198 million and a return on equity of -24.27% on March 31, 2015.

Are Gold Stocks a Value Investment?

Naturally, many investors will be wondering if gold mining stocks have become a value investment. They are very cheap right now, and some of them are making money despite the declining price of gold.

Goldcorp, for example, reported that its revenue grew by 29.97% even though it was trading at just $17.35 a share on July 24, 2015. Newmont Mining, which gave investors a return on equity of 4.59%, was trading at $17.80 a share on July 24, 2015.

Even AngloGold and Barrick Gold can be viewed as bargains. AngloGold was trading at just $6.78 a share, and Barrick was trading at $9.47 a share. Barrick also offered investors a forward dividend yield of 2.64% on July 24, 2015. Goldcorp offered investors a dividend yield of 3.43% on the same day. In contrast, Newmont had a dividend yield of just .56%.

The answer appears to be yes, gold miners look like a true value investment right now because they are cheap and some of them are making money. I’d rank Goldcorp and Newmont as real value investors because they are good companies that make money that trade at a really low price. Ashanti and Barrick look like real risks and companies on their way to the junk stock heap.

My advice here would be to wait because I don’t think gold stocks have hit bottom yet; they may not even be close. Expect to see further declines in this subsector for the foreseeable future.

Investors should also expect acquisition and consolidation as successful miners like Goldcorp start gobbling up some of their weaker competitors in order to get their assets. My prediction is that both Goldcorp and Newmont will start buying smaller miners.

Gold may not be doomed, but it is likely that we will not see high gold prices again for a long time. If history repeats itself, gold will not return to the historic highs until the year 2030. One has to wonder if any of the gold bugs that bought the metal in 1980 will still be holding onto it then waiting for it to recover so they can get out from underwater? If history repeats itself, they probably will because gold investment and the hysteria that drives it never goes out of style no matter how low gold prices fall.