Correction in Gold Mining Sector Close to a Bottom
By Sasha Cekerevac for Investment Contrarians |
The recent pullback in gold bullion has certainly hurt gold mining stocks. While one can develop a sound investment strategy, if the price of the stock continues moving downward, it makes it extremely difficult to step in and buy.
Gold mining stocks have seen a serious sell-off over the last few months. So what about gold mining stocks as a long-term investment strategy?
To begin with, looking at the commodity from an investment strategy point of view, gold has pulled back and has bounced off a key support level. Obviously, whatever direction the price of gold moves, the majority of gold mining stocks will move in tandem.
No one can predict the price of a commodity for certain. However, we do know that there remains strong demand for physical gold and that central banks around the world continue to have easy monetary policies.
While that is a sound investment strategy, it does not guarantee that gold will see an increase. The market could continue declining, as more sellers of paper gold emerge.
Assuming that gold prices will increase, gold mining stocks are beginning to look attractive, because they’ve declined to such a level that many are trading at a discount to book value. This means that if the company were to be bought and sold in pieces, the sum of the parts is worth more than the current stock price.
This type of investment strategy, looking for value, is one approach that an investor can take when trying to determine which gold mining stocks might be suitable for their portfolio. Momentum is not bullish for gold mining stocks at the moment, as we would need to see significant buying pressure and an increase in prices. However, for the long-term investor, looking for oversold and undervalued gold mining stocks might be an investment strategy worth investigating.
Chart courtesy of www.StockCharts.com
The stock chart above is an index of gold mining stocks spanning one year. Following the breakdown of gold mining stocks in late January, prices have recently rebounded on larger-than-average volume.
Currently, gold mining stocks are continuing to see substantial buying pressure, which is pushing the index up against its downward resistance level. We need to see a sustained move through this level before additional buyers will step in.
Have gold mining stocks hit a bottom? There is no easy answer; if gold moves upward, then yes, gold mining stocks will follow. However, if investors continue selling their paper gold holdings, gold mining stocks will fall through their recent lows.
Having said that, there are many gold mining stocks trading at extremely attractive valuations. If you believe in the long-term bullish story for gold as an investment strategy, I would suggest looking to gold mining stocks that are trading at very attractive valuations.
There are also different types of gold mining stocks, depending on one’s goal and investment strategy. Obviously, gold mining stocks that are purely in the exploratory or junior phase are not as correlated with the price of gold as they are to the success or failure of their exploration work. Larger gold mining stocks are extremely correlated with gold; but they are also correlated with potential issues regarding political risks, labor issues, and rising costs.
Having said that, at some point there is value in gold mining stocks. However, being a value investor can be a difficult investment strategy. This is because a value stock can remain a value stock for a very long period of time. There is nothing to force a value stock to increase in price. This is why I would advocate having a stop-loss limit in place, in case gold mining stocks resume their downward trajectory. It is always easier to take a small loss and re-enter a position at a later point.