Where to for Gold and Mining Stocks?

04/10/2013 8:30 am EST

Focus: COMMODITIES

Adrian Day

Chairman and CEO, Adrian Day Asset Management

Commodity expert Adrian Day shares his current outlook for gold as well as gold mining stocks.

Adrian, what’s happening with gold? We had a peak of about $1,900 and now we’re down significantly. Well, maybe not significantly. What’s going on?

Well, we are down from the peak, which was about 18 months ago. I think a couple of things. First of all, I think people always expect too much from gold.

Gold is the only asset of which I am aware that has actually gone up every year for the last 12 years. If you look at the average price last year, it was higher than the average price the year before, and so on. Gold is continuing to move ahead, and frankly we are overdue for a correction. I think this correction is probably fairly healthy.

One of the reasons we are seeing this correction, is I think gold moved up too far, too fast. There was all that talk about the debt ceiling 18 months ago and Europe was about to collapse and so on. Gold had already moved up too far, too fast. But no, I’m very sanguine on it at the moment.

What about the stocks, like the mining stocks? They’ve not really done as well as the price of gold.

You’re right. There has been a huge disconnect between gold bullion and the gold mining stocks. There are a lot of reasons for that. The main reason, well two main reasons...one is frankly that the costs of mining have gone up.

If you ask a mining company, “Hey, what’s your cost of production?” They will say something like, “Oh, $600, $800.” You think, wow, they must be making a lot of money. The cost of production, the marginal cost of bringing an ounce of gold out of the ground is only a part of your costs.

If you’re a mining company—not just gold, but if you’re any mining company—you’ve got a depleting asset. For a company like, say, Newmont Mining, which produces 5.2 million ounces a year, they have to find or acquire 5.2 million ounces next year just to stay even, just to stay even. That’s very, very difficult to do.

What has been happening in the last few years, companies have been overpaying for crazy acquisitions that haven’t turned out, perhaps, as well as they expected. You know, it’s a difficult business. I think that’s the main reason, and people are cottoning onto that.

From the individual investor's point of view, are they better off just owning the metal?

Good question. I think a lot depends on your objective in owning gold. If your objective in owning gold is for defensive purposes as an insurance reason, I think you are better off buying bullion. You know, you get 100%. Obviously if gold goes up, your bullion goes up, or if you have an ETF your bullion ETF goes up.

Having said that, there is no sector out there that gives you better potential for huge increases than the mining sector. You know, in the junior mining sectors, to see increases in stock prices of 5:1 or 10:1 are not unusual. Now I don’t mean they happen all the time, but they are not unusual. You are not going to get that in Dow (DOW), GE (GE), or anything else.

The key to me, apart from the objective in owning it, are you trying to preserve your assets or maximize your returns? So, your reason. Then, secondly, how much work are you prepared to do? Because buying gold stocks is a lot of work. For every one that does well, there are another two or three that do badly.

Do your homework.

Yeah.

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