Arca NYSE gold miners index
Five things holding the miners down
1: Geared to the gold price. When the gold price is on the up, the miners do incredibly well. If gold goes up 15%, miners' profits may go up 50% – perhaps more... production costs can be quickly dwarfed by a rise in the gold price, and so increased revenues from the high gold price feed straight through to the bottom line.
Problem is, the converse is also true. If the gold price falls, the miners may fall harder. And seeing as many in the market see the gold price falling from here, they sell off the miners in anticipation.
2: Mining costs aren't fixed. Gold production costs have escalated quite significantly – inflation in energy prices and other commodities have been a thorn in the side of the producers. On top of that, it's becoming increasingly difficult to find decent grades to mine. The 'low-hanging fruit' has been picked – it's now very hard work to refine each ounce of the precious yellow metal. Many gold miners would hate gold to slip below $1,500... and we're pretty close to that figure right now!
3: Central banks want gold – not miners. One of the reasons gold has held up relatively well is because there's large demand coming out of the emerging market central banks. The likes of China and Russia are filling their boots – other smaller nations are dipping in too. Wisely these guys want to diversify foreign reserves. And gold is the ultimate reserve currency. Not the gold miners!
4: Nationalisation fears. There's an irony at the heart of gold investing. Gold is often bought as an insurance policy to guard against turmoil and panic in the markets. And during periods of turmoil, governments can do strange things. With so much trouble at the heart of the Western financial system, many fear a blow up. If gold is in some way the solution to this fiscal mess, then many fear that miners will suffer windfall taxes, or even forced nationalisation. Many are starting to wonder whether it isn't safer to tuck away some gold coins than hold shares.
5: Sentiment. Many investors are just plain fed up with how badly run many of these miners seem to be. A while back, many stockholders found that management had sold future gold production at what were increasingly looking like very low prices. As the gold price escalated, many stockholders didn't benefit.
Today some miners have found other ways of messing things up. A fundamental lack of control on the cost side of things, and a poor pipeline of new resources seem to be the main (gold) bugbears.
So management is the biggest problem in the industry. Encouraged by a rising gold price, lots of miners have mined for more costly, inaccessible gold. In effect they've made big bets on the gold price.