Pick No. 1: Flyer – Gold Miners, specifically the Market Vectors Gold Miners ETF (GDX | A-54)
Finally, in deference to the spirit of New Year’s flyers, I’ll give you mine: gold miners.
I wrote a few weeks ago about how the decline in gold prices has decimated the entire ecosystem around gold, including miners. While the previous two picks all have charts pretty much anyone would love, this one’s a gut check:
Charts courtesy of StockCharts.com
I’m by no means a gold bug, so it’s pretty rare for me to be wringing my hands over the opportunity to dig into GDX.
It’s dominated by pure plays: Goldcorp, Barrick Gold and their ilk. And the cold hard reality is that whatever I think about gold, a lot of people will always continue to see it as an alternate currency and store of value, so it’s not actually going to go to zero. And the companies that are in the business of mining and refining the yellow stuff won’t go to zero either.
Even more to the point, many of these companies are actually integrated raw-materials companies that have a few fingers in a few other pies.
The biggest caveat to any play in GDX is the strong dollar. I think that relative to other currencies, the dollar is going to stay strong, and historically that’s a bad thing for GDX.
In this case, I don’t think that’s the driving factor here. I think the major factor is earnings and assets. The profit and loss sheets for a lot of these firms took enormous hits from write-downs of more than $25 billion in 2013. And there’s lots of reason for the declines—the marginal cost of production for many miners is now in unprofitable territory with gold at three-year lows.
So why in the world would you be a buyer? Honestly, it’s a multilayered hedge.
With GDX trading at a price-to-book of under 1, there’s just value here that at some point puts a floor under the share prices of these companies.
And I’m just paranoid enough to think that the U.S. economy—and the dollar—could go the other way. And if it does, we could see a rally in gold, and thus, the miners.
And I think any rally in miners will be dramatic, making GDX a high-flyer that maybe even Paul Baiocchi can love.
At the time this article was written, the author held no posisiotns in the securities mentioned. Contact Dave Nadig at [email protected].