Things could get much, much worse for gold stocks...
Gold has shed 13% over the past week. It's now trading at $1,360 an ounce, its lowest level in more than two years...
Some industry experts are calling the pullback "temporary" – gold remains in a secular (long-term) bull market. They may be right...
After all, gold is still up 50% since President Obama took office. And the Federal Reserve is committed to doing everything in its power to help stimulate our economy. That means keeping interest rates near historic lows and printing more money. In those conditions, gold is an attractive "hedge."
But if you think gold's recent collapse has presented a buying opportunity for gold stocks, think again...
Almost a year ago, I warned investors about a problem in the gold industry that few people talk about: The cost of producing an ounce of gold is soaring.
Gold producers are paying more for labor, permits, drilling, infrastructure, equipment, fuel, electricity... You name it. Mining has always been an expensive business. And it's just getting more expensive.
If you're invested in this space, you need to be aware of what's going on...
Over the past 12 months, most gold companies have seen slower earnings growth... or falling earnings. Take a look...
| Earnings per share | |||
| | 2010 | 2011 | 2012 |
| Goldcorp (GG) | $2.22 | $2.18 | $1.95 |
| Barrick Gold (ABX) | $3.16 | $4.67 | $3.82 |
| Newmont Mining (NEM) | $3.85 | $4.39 | $3.73 |
The problem is, gold prices stopped rising – while mining costs continued to climb. According to RBC Capital Markets, the average "all-in" costs for North American gold producers are estimated at $1,200 an ounce. ("All-in" cash costs take into account things like by-product costs and certain exploration expenses that are not usually reported in the financial statements of gold-mining companies.)
Some industry CEOs of a couple of the top gold-producing companies have talked about these rising costs in conference calls...
Mark Cutifani, who resigned last month as CEO of AngloGold Ashanti, stated: "If you want to go on a total cost basis, we're running at about $1,200 to produce gold. The industry average is probably around $1,250 an ounce."
Steve Letwin, CEO of Iamgold, recently said: "It's going to be difficult for anybody to produce gold at less than $1,200 an ounce." Even my good friend John Doody, editor of the Gold Stock Analyst newsletter and the smartest gold analyst I know, told me most gold companies are now paying well over $1,000 an ounce to produce gold.
When I wrote about this topic in June, gold prices were trading over $1,600 an ounce. Today, the price of gold is $1,360 an ounce. That's only about 10% higher than most producers are paying to produce an ounce of gold.
So yes, experts may be right. Gold may still be in a secular bull market. But if gold takes its time before resuming its uptrend, gold stocks could see real tough times. The cost of production is close to exceeding the spot price. Most gold companies will lose money on every ounce they produce if gold prices fall further from here.
Based on the numbers, you can see why gold companies have seen a steady decline in net income over the past two years. You can see why gold-stock prices are falling. And this trend will continue unless gold prices rebound from here.
My advice is to steer clear of gold stocks.
Good investing,
Frank Curzio
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