Friday’s trading session saw a halt in trading of two major precious-metals companies on news that the Chilean government was shutting down operations at the Pascua Lama mine. Barrick Gold Corporation (USA) (NYSE:ABX), which operates the mine, was halted first, with joint-venture partner Silver Wheaton Corp. (USA) (NYSE:SLW) halted a few minutes later. The mine, which Barrick has already spent more than $5 billion developing, represents one of the largest resources for gold and silver in the world.
The bigger question that Friday’s events raise is whether precious-metals companies are becoming cheap or dangerous at current levels. Barrick Gold Corporation (USA) (NYSE:ABX) is down about 40% this year, and while others such as Goldcorp Inc. (USA) (NYSE:GG) and Newmont Mining Corp (NYSE:NEM) are down less, they have still slid by roughly 20% each. Gold as a commodity is down more than 17% this year, as represented by the SPDR Gold Trust (ETF) (NYSEARCA:GLD). In addition, global macroeconomic events are aligning to make the future direction of precious metals very uncertain, at the very least increasing the volatility and risk associated with these types of investments.
What happened in Chile
The reason given for the stoppage at the Pascua Lama mine was the water handling being employed at that location.
The news represents a significant blow to Barrick and its JV partner Silver Wheaton Corp. (USA) (NYSE:SLW). Barrick Gold Corporation (USA) (NYSE:ABX)has poured money into the mine, which already has 18 million ounces of proven and probable gold reserves and 676 million ounces of silver. These levels make the location one of the largest sources of gold and silver anywhere. Both Barrick and Silver Wheaton closed near the day’s lows after they resumed trading.
The bigger picture
At their most recent earnings announcements, Goldcorp Inc. (USA) (NYSE:GG) and Newmont Mining Corp (NYSE:NEM) both reported disappointing results. These companies have come under similar pressures to the ones Barrick Gold Corporation (USA) (NYSE:ABX) faces. Goldcorp reiterated its full-year earnings view, but with recent developments from the Federal Reserve, the long-term prospects look mixed. Earlier in the week, minutes from the Federal Open Market Committee meeting suggest that a growing number of officials at the Fed favor slowing or ending quantitative easing; this news is generally considered bearish for precious metals, including GLD.
On the other side of the argument is the that there is convincing evidence that the current run in the stock market is driven by the current Fed policy. If the policy reverses, it may create a vacuum that drives stocks sharply lower. A significant fall in stocks will probably improve the picture for both gold and silver, making the current sell-off a potential buying opportunity.
With all of these swirling forces, the one probability is that volatility will increase. Increased volatility means increased risk, but the increased risk can be mitigated by taking a smaller position. Being aware of the forces at work is critical. Overall, maintaining an allocation to gold and silver is prudent, but allowing for the risks at play is paramount.
The article Do the Billions Spent Make Miners Cheap or Dangerous? originally appeared on Fool.com and is written by Doug Ehrman.
Fool contributor Doug Ehrman and The Motley Fool have no position in any of the stocks mentioned.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
