What Is Wrong with Gold Mining Stocks?


"There are some potential values beginning to surface in what could be an oversold industry segment where stocks are approaching 52-week lows across the board."

Although gold has been a solid performer in years past, the yellow metal has started to fall back in recent months, dipping below the $1,600/oz mark as of late. This represents a nearly $220/oz drop from the metal's 52 week highs, a disappointing trend given the broad risk-off trade in the markets during the second quarter of 2012.

Yet, while gold has been a weak place to put assets, the gold mining space has been a downright miserable spot for investors over the last six-month period. All four of the major gold mining ETFs—GDX, GDXJ, GGGG, and PSAU—are each down about 20% over the last half year, compared to a roughly 5.7% slump in the price of gold bullion over the same time period.

Unfortunately, this recent slump continues a relatively long history of underperformance for gold miners over the past few years. In fact, when looking at the past five years, GDX (the most popular and oldest gold mining ETF) has added about 16.7% while GLD has more than doubled, gaining 134% over the same time frame (see more on ETFs in the Zacks ETF Center).

Given this, one has to wonder why anyone still bothers with gold miners since not only do they often underperform precious metals, but they do so with significantly higher levels of volatility as well.

Still, some impressive values are beginning to appear in the gold mining space as evidenced by some of the valuation metrics in the big mining firms. For example, the PEG ratio for Barrick Gold (ABX - Analyst Report) is below 0.2, Goldcorp (GG - Analyst Report) looks to have EPS growth of about 18% this quarter, while Newmont Mining (NEM - Analyst Report) has a yield approaching 3%.

Despite these favorable metrics, it should be noted that the segment does rank quite poorly from a Zacks Industry Rank perspective—the gold mining segment is in the bottom 20% from this look— suggesting that more trouble could be ahead for the sector. Nevertheless, there are some potential values beginning to surface in what could be an oversold industry segment where stocks are approaching 52 week lows across the board. . .

Why do you think gold miners have underperformed by so much as of late?

Can they turn it around or will they continue to lag gold in the second half of the year?

Eric Dutram
Zacks Investment Research

(Eric Dutram is long IAU and gold bullion)

Get Our Streetwise Reports Newsletter Free

A valid email address is required to subscribe