Yes Alex, Gold Stocks are Dangerous
I was reading "Are Gold Stocks Dangerous" by Alex Wallenwein.
I have looked a quite a few gold stocks and I have never found one I like. He gives four good reasons to be really concerned about gold stocks:
The negative trends are:
Decreasing ore grades across the world's gold mining industry;Depletion of known deposits; (3) Difficulty in discovering new deposits to replace depleting ones;Rising production costs (fuel, transportation, inflation, etc.);Rapidly tightening environmental restrictions on gold mining and a deteriorating public image of mining companies as "nasty polluters", etc.
I have written about declining grade just to get an understanding of what that means to an investment. People read reserves being replaced and they fail to see the problem with the declining grade. Declining grade increases costs enormously.
Add another problem, the devaluation of the US dollar adds costs as wages are mostly paid in other currencies.
Another serious problem is that a lot of these companies have not been making ends meet. When you tear into their financial reports you find things like selling off equities and interests in other properties for sellar gains and this type of thing has been keeping some companies afloat.
You also have companies making most of their money on base metals. If you look at Goldcorp, in 2006 over 50% of revenue was from copper. The earnings are about half, from both the Glamis merger and from the gross decline in copper revenue. They have a plan to increase earnings by adding zinc to the pot.
Mine are depreciating assets. The gold is mined and sold. What you have afterwards is a hold in the ground. There is absolutely no value to that hole in the ground, and they are usually costs to secure the site after mining. Logically a mining company should be priced so that by the time the gold is mined, the earnings match the value of the market cap. If the life of mine is 12 years, it is depreciating at a rate of 8.3% per year, and that is common for gold mines.
Gold stocks are being valued with the same kind of dumb statements and logic that leads to bubbles.