SPDR Gold Trust (ETF) (GLD), Barrick Gold Corporation (USA) (ABX): Should You Trust Gold?

I thought Barrick Gold Corporation (USA) (NYSE:ABX) might see a nice bump before the inevitable decline. It is unbelievable that after months of hating on gold, I think there will be a small rise before it is sent to the underworld, and it skips the rise. Barrick’s situation is more dire than the metal’s itself. Its cost is supposed to around $800-$900 per ounce “all-in,” but in reality, it probably costs more, and at current prices margins could be paper thin.

Gold companies have to put in an increasing amount of money to develop projects. Free cash flow at Barrick Gold Corporation (USA) (NYSE:ABX)has been low, and the ability of the company to actually generate more cash is questionable.

You might consider Vale SA (ADR) (NYSE:VALE), which is a giant miner out of Brazil and has a lot of exposure to industrial metals. It does produce gold as a byproduct of other activities. Flipping the general wisdom that you always want gold “in them hills” might actually be best, considering the increased cost of extracting gold.

Rather than chasing ounces of gold, produce a mass of industrial metals, and take whatever gold comes out with it. Barrick Gold Corporation (USA) (NYSE:ABX) needs to show a stream of gold ounces being produced, but if gold production at Vale falls, it would not matter as long as its copper, iron, manganese, etc. production continues to grow. Vale SA (ADR) (NYSE:VALE) is considered a turnaround stock, but I think industrial metals will go up with time as demand increases with the economy. The same cannot be said of gold.

Conclusion

Gold miners are facing major obstacles. Vale SA (ADR) (NYSE:VALE) offers a lot of diversity and a light exposure to gold. I was wrong about a small rise in gold before the slide. It might be instinct to consider gold oversold and buy it. However, consider the fact that gold has no real intrinsic value. There is no overvalued or undervalued measure that actually makes sense.

In this context, oversold is a psychological condition that has people buying, because so many others have been selling. If nobody buys that as an investment thesis, then gold will languish at its new price range once it arrives there. I have written a lot about not trusting gold, and the one time I kind of did I was proven wrong, so I would avoid it like the plague.

Nihar Patel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.