Are Gold Miners Cheap or Dangerous?

Are the micro and macro issues that precious metals companies face worth the risk?

| More on:
The Motley Fool

Last Friday’s trading session saw a halt in trading of two major precious-metals companies on news that the Chilean government was shutting down operations at the Pascua Lama mine. Barrick Gold (TSX:ABX), which operates the mine, was halted first, with joint-venture partner Silver Wheaton (TSX:SLW) halted a few minutes later. The mine, which Barrick has already spent more than $5 billion developing, represents one of the largest resources for gold and silver in the world.

The bigger question that Friday’s events raise is whether precious-metals companies are becoming cheap or dangerous at current levels. Barrick is down about 40% this year, and while others such as Goldcorp (TSX:G) and Yamana (TSX:YRI) are down less, they have still slid by between 20-30% each. Gold as a commodity is down more than 17% this year, as represented by the SPDR Gold Trust.

Mining issues aside, global macroeconomic events are aligning to make the future direction of precious metals very uncertain.

The bigger picture
Recent developments from the Federal Reserve mean gold’s long-term prospects are at best mixed.  Last week, minutes from the Federal Open Market Committee meeting suggested that a growing number of officials at the Fed favour slowing or ending quantitative easing; this news is generally considered bearish for precious metals.

On the other side of the argument is that there is convincing evidence that the current run in the stock market is driven by the current Fed policy. If the policy reverses, it may create a vacuum that drives stocks sharply lower. A significant fall in stocks will probably improve the picture for both gold and silver, making the current sell-off a potential buying opportunity.

With all of these swirling forces, the one probability is that volatility will increase. Being aware of the forces at work is critical. Overall, maintaining an allocation to gold and silver is prudent, but allowing for the risks at play is paramount.

Owning great businesses over the long-term is one way to rise above many of the issues that face those who participate in the precious metals space.  The Motley Fool’s Special Free Report3 U.S. Stocks Every Canadian Should Own” profiles 3 of the world’s greatest businesses.  You can download this report at no charge by simply clicking here.

Follow us on Twitter and Facebook for the latest in Foolish investing.

The original version of this post, authored by Doug Ehrman, appeared on Fool.com. 

Fool contributor Doug Ehrman does not own shares of any of the companies mentioned at this time.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

growing plant shoots on stacked coins
Dividend Stocks

Here Are My Top 5 Dividend Aristocrats to Buy Right Now

Now is the time to buy these top five dividend aristocrats at their two-year low before they recover to 2021…

Read more »

Target. Stand out from the crowd
Stocks for Beginners

5 Stocks You Can Confidently Invest $500 in Right Now

Whether it's stocks making a comeback or proven investments over decades, these five belong in your portfolio.

Read more »

edit Businessman using calculator next to laptop
Investing

Unearthing Incredible Value: 2 Dirt-Cheap Commodity Stocks That Demand Attention Today

Barrick Gold (TSX:ABX) and another great mining stock look like huge value plays right here.

Read more »

A woman shops in a grocery store while pushing a stroller with a child
Investing

New Rules for Grocers: 1 Canadian Grocery Stock That Could Soar

Metro (TSX:MRU) stock looks poised to win as it signs onto the new grocery code of conduct.

Read more »

edit Real Estate Investment Trust REIT on double exsposure business background.
Dividend Stocks

Is NorthWest REIT Stock the Best High-Yield Dividend for You?

NorthWest REIT (TSX:NWH.UN) offers a substantial dividend, but exercise caution with this riskier stock.

Read more »

oil and gas pipeline
Energy Stocks

TC Energy Stock Is Starting to Get Ridiculously Oversold

TC Energy (TSX:TRP) stock is one of those deep-value dividend plays for the next decade and beyond.

Read more »

An analyst uses a computer and dashboard for data business analysis and Data Management System with KPI and metrics connected to the database for technology finance, operations, sales, marketing, and artificial intelligence.
Investing

Want to Get Richer? Here Are the 3 Best Stocks to Buy Now and Hold Forever

These three stocks all have fantastic operations and years of growth potential, making them three of the best to buy…

Read more »

STACKED COINS DEPICTING MONEY GROWTH
Dividend Stocks

Income Stocks: A Once-in-a-Decade Chance to Get Rich

These two income stocks are among the best on the TSX for those seeking consistent total returns over a long-term…

Read more »