Source: Gold Footpath by George Hodan.
Gold has a reputation for being a contrarian investment, and for more than a decade, returns for gold have generally diverged from what the stock market has brought investors. From 2000-2009, stocks suffered two bear markets while gold soared. After topping out at $1,900 per ounce in 2011, however, gold has plunged even as the stock market has climbed to countless new record highs. As gold has fallen, it has taken gold mining stocks down with it, sending the popular exchange-traded fund Market Vectors Gold Miners ETF (GDX 1.57%) to levels it hasn't seen since the worst of the financial crisis. Yet even as the gold miners face challenges, there are some reasons to believe that now might present a value opportunity for those looking to bet on a recovery in the sector. Let's take a look at three reasons why now might be the right time to consider adding the Market Vectors ETF to your portfolio.
1. Gold mining stocks have fallen even as gold itself has held its own.
In general, gold mining stock prices tend to track the price of gold very closely. After all, sales of the gold that gold-mining companies produce is their primary source of revenue, along with the other secondary metals like silver and copper that they often recover in the process of obtaining gold from their mine properties.
Yet when you look at recent trends, you'll see that the recent losses for gold-mining stocks have far exceeded the decline in gold prices.
Part of the reason for the disparity between gold and mining stocks is that earlier in the year, miners rallied in anticipation that gold prices had finally bottomed. With gold having started off 2014 with a solid advance off its 2013 lows, many investors believed that mining stocks would provide them with better potential returns than bullion itself, especially given the extent to which gold miners had suffered last year. Yet when gold moved decisively below $1,300 per ounce to hit new multi-year lows, it sent many investors scurrying for the exits. As a result, even though gold is essentially unchanged for the year, mining stocks have still seen substantial losses in 2014.
Some stocks have seen even bigger declines. Newmont Mining (NEM 1.18%) has lost more than 15% of its value so far in 2014, while Barrick Gold (GOLD 1.33%) and Freeport-McMoRan Copper & Gold (FCX 0.83%) have each seen declines of around 30%. Smaller mining companies have also tended to be more volatile.
Over longer periods of time, these moves tend to happen in cycles, with miners sometimes outperforming gold and sometimes underperforming it. Many believe that the cycle could be about to turn, and if so, then the potential to see better performance from miners could drive more interest in the Market Vectors ETF.
2. Harmful tax-loss selling will come to an end.
Another reason why the gold miners ETF could be a good value right now is that the ETF is a logical target for investors using the tax-loss harvesting strategy to reduce their tax burdens. With much of the stock market up on the year, investors looking to lock in losses don't have many options, and gold miners are one logical place to look. Tax-loss selling often exacerbates losses in November and December, creating temporary downdrafts that make the stocks look even worse. Yet when that pressure dissipates, the beginning of the following year can be favorable.
Tax-loss selling isn't necessarily over yet, but if you like the longer-term prospects for gold miners, it makes sense to look at the ETF in the coming weeks. Trying to pinpoint the best entry point is likely a fruitless effort, but you probably have some time before a tax-motivated bounce returns in full force.
3. Falling energy prices could bring gold mining costs down.
In recent weeks, the price of crude oil has fallen sharply, with both domestic and international benchmark prices falling more than $20 per barrel. For energy companies, that's been bad news, as their revenue comes from sales of oil and related products.
Brent Crude Oil Spot Price data by YCharts
For mining companies like Barrick, Newmont, and Freeport, though, fuel can be a considerable operating expense, and so any reduction in energy costs can help reduce the overall overhead of running a mining operation. With many miners having faced rising labor expenses and other cost pressures, any reduction on the energy side of the business could help bolster net income and make it easier to generate consistent profits even if gold prices don't behave well.
The Market Vectors Gold Miners ETF hasn't looked like an attractive place for investors recently. Yet for those willing to make contrarian bets on the health of the mining industry going forward, looking at the ETF as a possible profit opportunity would be an interesting strategy to consider at current prices.
