The stock market and a number of commodities are in correction and this is no surprise at all. I want to repeat my view that all kinds of solid, growing gold mining companies are becoming very attractively priced right now and, as a sector, it’s worth putting gold stocks on your radar screen.
It’s a bit too early to jump right in with the spot price of gold likely to experience more downside. From a stock market perspective, most gold stocks began pulling back hard in mid-March, affecting even the best stocks within the sector. We’ve got to see the spot price of gold bottom out from its current downtrend and then I think we’ll have another really good entry point for considering new positions.
Investing in gold has always been a risky business, but it’s a worthwhile endeavor if you’re a stock market and commodities speculator. The key, like always, is to get the cycle right—timing in the investment business is everything. Even though the long-term trend might still be intact, the spot price of gold could easily go down to $1,200 or $1,100 an ounce. Why not? Gold has been in a bull market since 2002. The current price action in spot gold is very similar to the correction that occurred 2008/2009 and I wouldn’t be surprised at all if it repeated this trend: correction, recovery, consolidation, and then re-acceleration. It does take time.
Right now, there are large, medium and small producers of gold trading for reasonable prices on the stock market. A lot of these companies have little to no debt and are sitting on large cash hoards, waiting to put that money into new exploration and development. (See Everything Gold Is Turning Into Some Serious Green.) Even though gold stocks aren’t going up right now, it is an exciting time to be in this industry.
Speculating in gold mining stocks is a difficult business. You can find the best growth story out there, but if the spot price isn’t going up, then you aren’t likely to make any money. That’s why, as a stock market speculator, the majority of the time you need the spot price tailwind behind you. Or you go the other way and short these stocks when spot prices are falling. Just like in the oil market, spot price action is everything.
What I find attractive in a gold mining stock is finding a company that offer a “package” of good business fundamentals. This means that a gold mining company should already be producing and selling ounces of gold with detailed expectations for increased production over the coming quarters and years. The company should have other properties that it’s exploring, even in conjunction with other, perhaps larger mining companies. There needs to be a track record of financial growth, along with lots of cash in the bank for further exploration activities. Finally, a decent track record on the stock market is always helpful; it shows that institutional investors know about the business and are willing to invest and/or trade the stock.
I think we have more downside ahead in the stock market and in precious metals and other commodities. We’ve been due for a correction and here it is. I do see an underlying strength in the U.S. economy that, while not robust, is a good foundation for the future. For stock market investors, be prepared for further correction.