Are Gold Mining Stocks Set to Take Off?
So far this year, mining stocks have lagged behind the soaring price of gold
Fear has crept back into the markets, and the most obvious beneficiary of renewed concerns of a global recession is gold. The metal, which now trades near
"Traditionally, gold mining companies actually give you leverage to gold prices, so when gold prices go up by, say, a percent, typically, share prices of gold mining companies should go up by 2 or 3 percent," says
For starters, when the stock market experiences a major sell-off as it has recently, investors tend to sell indiscriminately. "Gold stocks are ultimately just stocks, and they've sold off with the rest of the market," says
Gold miners have also been hit hard by rising costs of commodities like the price of oil, which has cut into their profit margins. But now that oil has dropped to around
Winmill offers a rule-of-thumb for evaluating the attractiveness of mining stocks. He compares the price of the BUGS Index (HUI), which stands for "basket of unhedged gold stocks," to the price of gold. To do this, divide the price of the HUI Index by the price of gold to get a ratio. When that ratio is between 0.35 and 0.4, it's in what Winmill calls a "neutral range." If it rises above 0.4, he says investors should sell gold mining stocks and buy gold. But when it's below 0.35, investors should think about buying gold mining stocks. "We've been in that zone now for the last three months," he says. Within the
Some companies have even promised to link their dividend policy to the price of gold. Earlier this year, Newmont said it would raise its dividend by a
For yield-hungry investors, Park says there are seven gold miners with market caps of
If you're looking for broad exposure to all gold mining stocks, Park suggests two ETFs: Market Vectors Gold Miners (GDX) and Market Vectors Junior Gold Miners (GDXJ). The former provides exposure to the largest mining stocks, and the latter offers exposure to "junior" miners -- those that are considered small and midsize stocks.
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