Guest Post: Four Reasons Why Gold Stocks Are So Hated

Tyler Durden's picture

Submitted by Simon Black of Sovereign Man blog,

Five full years on from the financial crisis, stock markets have regained lost ground and are within striking distance of new record highs.

Yet, it’s only NOW, after all the gains from the bottom have been made, that the investing crowd is starting to put money back into stocks.

Curious. When stocks were CHEAP, nobody wanted them. Now that they’ve breached record nominal highs again (Dow 14,000++), investors are piling back in.

It’s almost a cliche, but to make money investing, you generally have to buy something when nobody else wants it, and sell when everyone wants to buy.

For example, I wrote in early December that the Shanghai Stock Exchange (SSE) index was due for a bounce. Sentiment had hit rock bottom. Retail Chinese investment accounts were dormant. And the headlines warned of impending doom as the index hit a 4-year low.

But, as I suggested, BUYING was the right call, and we’ve made about 20% since then.

However, the rebound has played out. If you followed me on this trade, I suggest taking profits. I’m personally unwilling to risk holding Chinese stocks long term.

That’s because, just as in the West, the Chinese government is engaging in a giant game of “extend and pretend.” Chinese banks have just rolled over 75% of all loans to local governments, which were supposed to have been repaid by the end of 2012.

We’re talking about at least 3 trillion Chinese Yuan, or nearly half a TRILLION dollars worth of debt. It’s an enormous burden.

The China trade was a short-term idea, speculating that sentiment would bounce and the index would recover. We were right. And looking around today, I see another opportunity along the same lines– GOLD STOCKS.

As a group, gold stocks are down between 20% and 30% over the past year. Yet in that same timeframe, the price of the gold has risen.

As a result, sentiment toward gold stocks is pitiful. Even diehard gold bugs are tired of losing money in gold stocks and have been dumping their shares in disgust.

There are 4 main reasons I can think of why gold stocks might be so cheap:

  1. Now that the talking heads on TV are all telling us that the financial crisis is over, people expect the gold price to fall.
  2. The presence of many alternative gold investments (Exchange Traded Funds like ‘GLD’) provides a means for people to have gold exposure without having to buy mining stocks.
  3. Some investors may perceive that the increased cost of extracting gold is outpacing the price of gold, meaning that profit margins of gold mining companies may be deteriorating.
  4. The prospect of a deflationary credit crunch would eliminate the availability of project financing, putting new mines at risk, particularly among the smaller miners.

Let’s examine these in turn.

Reason 1 is unrealistic. Stocks are hitting 5-year highs, but the root causes of financial crisis, namely too much borrowing and spending, have not been addressed.

There is more money and debt in existence now than ever in history. Central banks have created trillions of dollars out of thin air. And debts have merely migrated from the private sector to public balance sheets.

In our view, gold remains an EXCELLENT hedge against systemic risk in our view.

Reason number 2 is partly true. A lot of money that might have gone into gold mining stocks has instead gone into the many paper gold and ETF products that have proliferated in this bull market.

But with gold stocks now RELATIVELY cheaper against gold itself, a reversion to the mean seems a reasonable expectation.

Reasons 3 and 4 are possibilities. Mining costs are rising, and a deflationary credit crunch could really affect production if mining companies lose their financing.

Initially, this scenario would likely put downward pressure on both gold prices and the equity value of mining companies who would see their project financing opportunities diminish.

To me, these are among the chief risks we would be assuming by buying gold stocks over the long-term.

But I’m not suggesting this trade for the long-term. It’s like the China recommendation in December. I’m suggesting that there’s money to be made buying a HATED sector of the stock market while it’s out of fashion and nobody wants it.

Right now, this means gold stocks. More than likely, sentiment will rebound, the crowd will come back, and we’ll be able to lock in short-term profits.

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msohn's picture

Until the industry can control project cost inflation, there is no reason to own the gold mining companies. Overly simplistic analysis will talk about $ per gold in the ground, but until you have a producing mine, good luck monetizing 1 gram of gold per ton of rock. Factor in the cost of capital investment, the risk of operating cost escalation, and all of a sudden the adjusted enterprise value per ounce of the gold in the ground (which must be discounted over a 20+ year life) starts to look like less of a bargain.

Are we in an inflationary world, or a deflationary one? Or, as I believe, are they joined at the hip.

Without an answer to this question, it really makes no sense to own the miners.

Own the Royalty Companies.

derek_vineyard's picture

In hindsight.....anyone who stepped up at spx 666-1000 is a genius. Armageddon that never came.  Everything now is bid up, you missed the wealth building part of the party.

Spitzer's picture

Gold in the ground is priced below silver in a few of these gold stocks. The Sovereign Man is right, the market is groping for a bottom.

Your reasoning is classic fundamental bullshit.

r3phl0x's picture

I agree with you, but corp estimates of recoverable gold are always extremely optimistic, given that overestimating improves the wealth of employees and management at least temporarily.

Spitzer's picture

Missing estimates doesn't help. Some companies do the opposite.

Half_A_Billion_Hollow_Points's picture




20%?  fuck this shit.  Bitcoin gained over 50% in January alone, and it's still rising.  


The REAL strategy is: save monthly in bitcoin, wait 6 months, go to, unload the bitcoins for gold (at half price due to bitcoin's gains).  Rinse repeat.  This way you gtfo of the gold market manipulators and minimize the risk of bitcoin vanishing to $0.


Can't fucking short bitcoin, right JP Morgan cocksuckers?


Of course, at today's price of $22.20 for a single bitcoin, it's gotta be in for a correction, 50% gains in February again will freak everyone out.

trav777's picture

yeah they can't because they can't control nationalization cost or energy input.  The ore grades are so shitty now that any perturbation in anything causes them to blow up.

I own an assload of miner stock, thus I hate them

FMR Bankster's picture

Don't forget that these are some of the worst run companies around. For years they traded at insane levels because it was difficult for average people to acquire gold. Now with more competition making physical gold purchases reasonable, and ETF's for those who like to own paper, investors can concentrate on the fact that none of these dogs consistently earn their cost of capital.

Spitzer's picture

That is such fucking shit. Goldcorp has no debt. There is allot of Jr explorers with no debt.

You can buy ETF everything these days. Why do ppl always say that about gold only ?

bobthehorse's picture

Physical gold, bitches.

The stuff is great--until Europe collapses.

Then the dollar will be king once again.

flacon's picture

U$ Dollar will be king of the shit pile. 

jimmytorpedo's picture

The leper with the most fingers wins.


boogerbently's picture

In the land of the blind, the one-eyed man is king.

Spitzer's picture

And that would be the Euro you closet dollar homos

Doubleguns's picture

The dollar would be the corn in the shit pile.

Harbanger's picture

I'm sure there's already a new global monetary system in place to replace all the currencies after the debt bubble crash.  Which they created.   They will collectively devalue all currencies and issue some new monetary unit or units.   The new fiat units would of course be worth much less than the old ones.

Stares straight ahead's picture

I agree. It might go something like this: On a Saturday morning it is announced in a distressed country of interest, that its currency is worthless and one is now required to exchange it for the new issued currency. As additional countries implode or become unstable, their exchange to the new international currency will occur at an adjusted exchange rate (relative to those before them). Debt could not only be preserved this way, it might be arbitrarily rebalanced. ( The whole crisis could be managed/delayed for some years more before the inequities in trade re-emerge and cause a crisis anew).

(BTW, last night I fucked the dragon lady, after she served steak.)

Stares straight ahead's picture

Gold still rules in this scenario, I forgot to mention.

Newager23's picture

Many mining stocks are going to do really well as gold goes to $3,000. And I am not talking about small returns. We will see many companies match what First Majestic did from 2009 to 2012, when it rose 2,000% from $1 to $20. That is not a 200% return, but a 2,000% return. You can't get that anywhere but the minining stocks.

There is going to be many stocks that have 1,000% returns when gold goes to $3,000. And now is the time to buy them, when they are very, very cheap. I have nearly 100 gold and silver mining stocks listed as top picks on my website (you need to be a member to search the database). That is a lot of stocks to look through to find opportunities.

I also have a list of potential 25 baggers and potential 50 baggers. There are many mining stocks today that are trading at less than $10 per oz gold in the ground, and silver stocks for less than $1 of silver in the ground. It's pretty crazy how cheap these stocks are, yet NO ONE wants to own them.

I agree that the risk is high, how else can you get these kind of returns? But if gold goes to $3,000 (and that is my expectation), many of these stocks are going to fly. Maybe you won't buy them today, but you should at least take a look and see which ones have the best chance to be high flyers. If we do have a mania in gold and silver mining stocks (and I don't see how we won't), this should be one of the best investments this decade.

I agree with all of the arguments in this article on why not to buy mining stocks. However, higher gold and silver prices make most of those argument moot. Profit is profit, and there won't be many industries making as much as the gold and silver miners at $3,000 gold and $100 silver.

Banksters's picture

‘Pursuing Justice’


“Well, I think I am pursuing justice,” he said. “And I think the entire responsibility of the department is to pursue justice. But in any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against Institution A, and as a result of bringing that case, there’s some huge economic effect -- if it creates a ripple effect so that suddenly, counterparties and other financial institutions or other companies that had nothing to do with this are affected badly -- it’s a factor we need to know and understand.”

Banks Must End ‘Brazen, Flagrant’ Manipulation: CFTC’s Chilton

A nation of laws my ass.



GFORCE's picture

Hugh Hendry said owning gold miners was the closest thing to insanity.

bad craziness's picture

Hugh Hendry would be in my dream team but so would Jim Sinclair and when it comes to gold Jim Sinclair wipes the floor with anyone.  Never been wrong on the big picture calls and has seen most of this farce coming for years.

Why does this site not have his site linked as he beats the shit out of most under the Zero Hedge Reads.

His latest missive:

Anyone care to bet against him?

NotApplicable's picture

Sinclair also brings up a point missed by Simon. Recourse vs. non-recourse loans.

Many of the miners have assets (properties) tied up in financing schemes. So, if a project goes bust, there goes the assets along with it.

Another thing Simon missed was Chavez. There is no way these "leaders" will alllow mining companies to dig up "their" money. As conditions worsen, so will the legal restraints protecting the owners.

I don't expect any miners to survive that aren't "in the club," like say, Barrick and Anglo.

boogerbently's picture

EVERYONE bashing miners.

Must be time to buy.

mkhs's picture

If it is in print, it is too late.  Better luck next time.

augustusgloop's picture

Right- this article appearing on ZH is like the "Death of Equities" 1979 Business week cover. Nice contratrian indicator. Or has the Contrarian Indicator of MSM cover meme iteself become over hyped and is a false contrarian indicator? 

Squid Vicious's picture

seems like for many the all-in production costs have risen faster than price of PM's the last few years, plus political risk and risk of PM's depreciating are always lurking... I have given up on the miners...maybe I'm helping to make your point, lol...

Eally Ucked's picture

Everybody's reporting costs per ounce in the range of 750$, except start ups. Mines in States and Canada supposedly don't have any politcal risks so what is the reason for pricing of those stocks so low? I think they expect plunge in price of gold at any time. Probably managing expectations is in full force not only in price of gold (despite trillions being printed every year) but also in minig stocks to make it appear as very wide front of gold disbelievers getting rid of everything connected to it.

ebworthen's picture

Let's hope so.

The mining stocks I bought back in 2009 were doing great until November of 2011 and have been hammered since.

It's the only stock I bought, along with physical PM's, as the only thing I wanted to invest in were the aquisition of tangibles or tangibles themselves.

It's o.k., I'm ahead 50%, but 100%+ would be just fine, then I could buy more physical.

The Duke of New York A No.1's picture

The Public Gold co. CEO's are mostly pin-heads who are just on the job to get a paycheck and milk the shareholders... if your going to get into Gold Mining - do it privately, and hire the best.

Pancho Villa's picture

This article points out that gold mining companies have almost doubled their shares outstanding since 2003, which significantly dilutes their earnings:

I don't necessarily agree with everything in the article, but it is food for thought. Before buying a gold miner, it might be worthwhile looking at how many shares it has issued and how many of those are going to management. Actually, that should be done before investing in any stock. But it seems to be particularly important for gold miners.

augustusgloop's picture

Jose Doroteo, 

Congratulation on taking the share dilution out of context... or at least not reading past the 2nd paragraph. Because just after showing that miners doubled shares, CR states, "Second, despite the large increase in shares outstanding, HUI companies have grown their market capitalization by 302.5% as of the fourth quarter of 2012, quadrupling the size of the group."



Pancho Villa's picture

The chart in the article shows that the current number is under 250%. And that 250% increase is spread over twice the number of shares, so if you had owned a share in 2003, it would have increased by less than 100%. Not a terrible return, but gold itself went from $400 in 2003 to $1600+ today which is considerably better.

For example, let's assume a 300% increase in market cap even though that is cherry picking the top. Suppose there are 100 million shares with a market cap of $100 million in 2003. That's one dollar per share. Suppose the market cap goes up to $400 million, a 300% increase. If the number of shares stays the same, your share went up to $4, giving you a 300% increase. But If the number of shares doubles, that is $2 per share. So your share only increased by 100%.

What are you? A gold company executive? Or just an idiot who is fine with letting company executives steal most of the profits so long as the stock goes up a little bit?

Congratulations on being a dupe...

oddjob's picture

yeah, morons like Alberto Arias,

 you'd be crazy to put your money where he does, I mean what could he know.

fonzannoon's picture

Simon Black is such an incredible putz. Can someone please link me to his blog where in 2008 he was announcing stocks were cheap? Which they were not.

Eally Ucked's picture

hey, listen he has to make some money and it comes mainly from other putzes. So his compilations of news and articles of other authors and opinions is as good as many gurus on the market, they just copy each other in their opinions. You want to make money use your fucken brain and forget those miraculous recipies for success. I know you do it any way, just trying to fuel discussion.


Fred C Dobbs's picture

Any opinions on NUGT or DUST?

Jendrzejczyk's picture

If you happen across any gold nuggets or dust, promptly purchase a canoe.

cthulhu's picture

OK, what number is "expropriation"?

Motorhead's picture

Amazing what they teach you at West Point.

drumpoint's picture

Duty, Honor, Country. . . anything else?

savagegoose's picture

its simmple  cpaital gains arnt  seen  as a  value nvestment in a corrupted market.  make gold stocks pay dividends, and see the  investors pile in.

Venerability's picture

I'm very against their paying dividends. 

They have to be completely re-positioned as the ultimate Growth stocks, just as the sector has to be re-positioned in the Gold-hating US and UK as the ultimate Growth sector, the ultimate play on a larger and larger Bourgeois population in the one-half of the world that hasn't had one.

(The rest of the world already knows this, although they don't articulate it well yet, either.)

And you need to rope in the Progressives by re-educating them about the function of the Monetary Metals as levelers and anti-Colonialist factors in the New World Currency Regime.

Progressives in the US and UK should actually LOVE Gold - but no one has told them why.

Conservatives we have.

Libertarians we have too many of.

We need to bring in the Centrists and Progressives - now more than ever.  

FranSix's picture

Higher dividends means higher growth:

Research Associates

But what gold companies have been doing is seeking growth without rewards, mostly through dilution of their shares and malinvestment.

Venerability's picture

And here I thought you were finally going to have the cojones not to let the KochBots thumbs down a coupla posts of mine by rote!

Everyone who actually cares about this sector knows I'm right.

And not only about this sector.

But Hey, "Hose El" jokey jokey jokey, while we see more and more financial services layoffs and the "99 percent" continue to shun The Casino.

The period of our "Detente Cordial" was the most productive and forward-looking period we've had in these Markets for decades.

Why anyone sane would want to ruin it - because The Ego-Driven Dwarf is hurt by my comments? - is allowing Emotion to cloud their grasp on Reality - Market-wise and Otherwise.

I already see quite a lot of evidence that the sane elements among the PPTs understand all this. Let's get some follow-through, maybe starting today.

Venerability's picture

My, my Playing Against Each Other isn't that lucrative, is it?

You want brand-new blood, and you're simply not getting it this way.

I've been telling you for years how to get it - easily, too! - but you are all so unimaginative and set in your ways, that you'd rather continue the same ole Baby Games which haven't served you well for many years now, and still won't.

If there is one voice you all need in your efforts to draw more people into the sector, it is mine. So whaddya do? You proceed to turn SA into the same kind of malicious teeny bopper joke Yahoo Finance has been for decades by suddenly shutting me out.

The Bird can find many other outlets to get her voice heard.

But YOU are running out of time to re-legitimatize a part of the Market that has been a long-time money maker for you.

We were doing so well the past four years, literally glueing Gold and Silver to the entire universe of Risk On assets.

So all of a sudden, CNBC Ninnies speak, and you all just CAVE? Yes, yes, you're right! Let's all go back to 1997, that halcyon age for eyeballs and other bleepity-bleep and horror show for anything of value. 

And by all means, embrace Tiny Terror again, no matter how horrid he's become. And discredit The Bird, no matter that she's considered a heroine now, THE Market Freedom Fighter, to pretty much every risk-taking non-prop desk, over age 40 Market participant around the world.

Bright, bright behavior - NOT!


mkhs's picture

SA?  Is this cut and paste from Seeking Alpha?