By Ben Kramer-Miller
Wall Street Cheat Sheet
With gold prices rebounding this year, investors have naturally bid up the prices of several gold mining stocks. The Market Vectors Gold Miners ETF (NYSEARCA:GDX) is up over 12 percent for the year, and this is much better than the S&P 500’s 2 percent gain year-to-date. I think this outperformance is set to continue given that stock prices are elevated, and given that gold prices are depressed while remaining in a long term bull market.
But simply buying the GDX because gold prices are rising doesn’t make sense. After all, there are two numbers that are important to gold miners — the cost of gold and the cost of mining it. Gold miners underperformed so markedly over the past couple of years because both numbers were going against it — the gold price was falling and the cost of mining it was rising. In fact, for many larger companies costs exceeded the gold price.
Thus, rather than buying GDX shares, investors would be better off finding those gold miners that are effectively seeing gains on the cost side of the equation. Companies that are taking aggressive measures to cut costs may be forced to write-down some of its high-cost producing mines, and it may also wind up cutting production. But this fiscal responsibility is going to put these companies at an advantage longer term.