Losing its Luster
Always volatile gold prices have been on a slow decline for most of the last six months. However, that descent picked up steam recently on economic news.
Usually, economic concerns drive up the price of gold. However, the economic troubles in Cyprus have led that nation to sell the yellow metal. Adding more supply to a commodity market is never a good thing. Moreover, easing inflation concerns in the United States have also taken a toll.
According to Bloomberg, gold has had a 12-year run of positive returns. That’s impressive for any financial asset, so it isn’t surprising that the commodity is taking a breather so far this year. However, the question investors must ask is if this is a blip or will it turn into a full on blood bath?
For investors who think the sell off is a temporary turn of events, here are three stocks to look at now:
A Construction Discount
Barrick Gold Corporation (USA) (NYSE:ABX) is one of the world’s largest gold miners. It also has operations in silver and copper. The company’s big issues today are the falling price of gold and the construction of a massive project that isn’t going very well.
While there is little Barrick Gold Corporation (USA) (NYSE:ABX) can do about the price of gold, mine construction is another issue. The company actually has two notable projects, one in the Dominican Republic that appears to be going reasonably well and another spanning the border of Argentina and Chile. It is the latter mine that is causing the most trouble.
Chile has stopped the construction on its side of the border because of concerns about the mine’s impact on glaciers. Argentina is concerned about the same issue, but hasn’t stepped in to stop construction. And dust control is also being brought up. This mine is massive and would materially increase the company’s output, so delays are a big problem. If the mine never opens, it would be an even bigger issue.
The sell off now has the shares yielding over 3.5%. While gold’s fall could clearly impact the sustainability of the dividend, Barrick Gold Corporation (USA) (NYSE:ABX) has long survived such price volatility. Construction news is likely to be the bigger issue for the shares. In fact, the shares could rally if its Argentina/Chile project gets back on track.
A Dividend Tied to Gold
Newmont Mining Corp (NYSE:NEM) is another of the world’s largest gold miners. A drop in gold prices is probably the biggest concern facing these shares. However, older mines is a secondary concern. As properties age, they tend to produce less ore. That basically requires that new assets be brought on line to make up for the declining assets.
On that score, a mine project in Peru is facing troubles and a big project in Australia hasn’t turned out to be as profitable as hoped. And a project in Indonesia is progressing, but has notable risks associated with it. On the flip side, domestic mine expansions appear to be going well.
Newmont Mining Corp (NYSE:NEM)’s dividend is tied to gold. While the yield is closing in on 5%, the recent drop in gold prices could lead to a dividend cut. For income investors who think gold is likely to stabilize or head higher after a brief correction, however, this could be a good time to buy.
High Costs
Both Newmont Mining Corp (NYSE:NEM) and Barrick have about average costs within the industry. And both are largely in stable markets. Gold Fields Limited (ADR) (NYSE:GFI), on the other hand, is heavily concentrated in South Africa and its production costs tend to be on the high end of the industry. That makes the company a high-risk play on gold prices.
That said, the company is trying to diversify its asset base somewhat. That process, however, will be a long one in the making. In fact, the company has some interesting projects on the drawing board, they just won’t be helpful in the near term. So this miner remains most appropriate for aggressive investors looking for a gold rally after the sell off.
Watch or Invest?
Commodity prices are hard to predict and gold has sold off hard and fast. Although that may or may not be a buying opportunity, it does suggest that investors should take the time to examine the sector. The three stocks above all have unique aspects to their businesses that could make them potential investment candidates. It’s hard to buy when everyone is selling, but that’s often the best time to go shopping.
The article Buying the Gold Slump originally appeared on Fool.com and is written by Reuben Brewer.
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