Daily Gains Letter

Buying Miners: A Good Idea When Gold Prices Fall?

By for Daily Gains Letter |

190413_DL_zulfiqarGold is in a bear market territory. The price of the shiny yellow metal has fallen almost 30% since the highs it made above $1,900 an ounce in April of 2011. Look at the chart below—it seems gold bullion prices have fallen off a cliff.

dl_04192013_graph1Stock chart courtesy of www.StockCharts.com

As there has been a significant decline in gold bullion prices, analysts are projecting many estimates, on both the bear side and the bull side. Some are calling the decline a great buying opportunity, while others are saying the bubble is bursting. Price forecasts have gone haywire, as well—I have heard estimates as low as $800.00 an ounce to $1,600 and higher.

With this said, is it a good time to buy gold? Should you buy physical gold or gold miners (after all, they are selling at deep discounts)?

When it comes to investing in gold bullion, some may suggest investing in gold miners to get the greatest bang for your buck. Their argument: if a gold miner has the ability to extract the metal from the ground at a cost below the spot price, and the price goes higher, investors can earn higher returns compared to just holding gold in solid form (bars, coins, etc.).

This is certainly true; profits are much higher when gold prices are on the rise. But as gold prices fall, the profitability of gold miners gets hurt, and the losses can occur in multiples as well. Consider the chart of the Market Vectors Gold Miners ETF (NYSEArca/GDX) below. This exchange-traded fund (ETF) holds some of the well-known miners and lets investors take advantage of their price movement.

dl_04192013_graph2Stock chart courtesy of www.StockCharts.com

Back in 2011, when gold bullion prices were trading at their highs, this ETF was near its peak as well. Since then, as the yellow metal has fallen by only 30%, gold miners have fallen much further in price—this ETF alone has dropped more than 50%, from trading above $60.00 to below $30.00 now.

In addition to all this, if investors are looking to buy gold miners instead of physical gold, they may not realize that there are some risks they must bear. For example, if the cost to extract gold from the ground increases and spot prices fall, the gold miners will face even more severe pressures. In addition, gold miners also possess a location risk. If their mining prosperities are located in vulnerable places, such as a country that’s politically unstable, their production can be halted and profitability can be shattered very quickly.

For investors who are looking to preserve their capital, buying gold miners when the price of gold bullion is going down may not be the best idea—they fall faster than the metal price. As a result, their portfolios can face significant losses.

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