Keeping Them Honest: How I Lost Money with Gold in 2012

Before I set out to issue my top gold stock recommendations for 2013, I believe it's my duty to inform you that I lost money with gold in 2012. Yes, it's true: Even in the midst of a powerful secular bull market like the one that's still in place for gold, it's entirely possible to have down years in which the gold miners at large fail to deliver market-beating returns.

The previous year had not been entirely kind to gold stock investors either, but at least in 2011 the price of gold managed to outperform the S&P 500 (SNPINDEX: ^GSPC  ) to help contain the damage. In 2012, however, gold's meager advance -- as reflected in the 5.7% advance year to date for bullion proxy SPDR Gold Trust (NYSEMKT: GLD  ) -- has fallen far short of the substantial 12.7% gain for the S&P 500.

For the miners -- plagued as they have been by severe cost inflation, widespread operational setbacks, and a range of other issues -- their repeated failure to deliver the investment gains that could reasonably be expected in this elevated price environment remains a sharp thorn in the side for gold investors like myself. Evy Hambro, who manages the $12 billion World Mining Fund at BlackRock, is entirely justified in condemning the mining industry's "appalling track record of value destruction" over the past several years. Year-to-date, the Market Vectors Gold Miners ETF (NYSEMKT: GDX  ) has suffered a major 12% retreat, while the smaller-cap benchmark Market Vectors Junior Gold Miners ETF (NYSEMKT: GDXJ  ) is down nearly 17%!

Ultimately, how you judge my performance as a stock picker in the gold mining industry during 2012 will depend upon your preferred measuring stick. My top 10 picks for 2012, which I presented to investors in this two-part series last December, look poised to close the year with a slight loss that currently comes in at (2.2%) for an equal-weighted average. While of course I am relieved that I outperformed the relevant industry benchmark ETFs, I am deeply dissatisfied with my failure to outperform both the gold price itself and the S&P 500. After all, for all the inherent risk associated with exposure to miners, there must be a commensurate reward to justify the risk. Unfortunately, in 2012, that just wasn't the case. Let's take a look at some of my individual picks to see if we can discern what went wrong.

I was a one-hit wonder in 2012
I know Thanksgiving is behind us, but this year I have particular cause to be thankful for Primero Mining (NYSE: PPP  ) . I selected Primero as my No. 1 stock pick for 2012 after dubbing this "The Greatest Gold Stock in the World" a few months earlier. I perceived ultra-deep value in the shares as a series of key challenges remained to be overcome, and over the course of 2012 Primero positively triumphed in every way imaginable. My bullish thesis relied upon the successful resolution of that troublesome tax issue relating to silver delivered to stream holder Silver Wheaton (NYSE: SLW  ) , timely confirmation of the substantial resource potential at the San Dimas mine, and meaningful progress toward expansion of that operation. On all three counts, Primero came through to power the gold industry's premier stock performance. At its 2012 peak, Primero logged a 148% advance, while presently the stock retains a gain of 93%.

After Primero, the second-best performer among my top picks is Paramount Gold & Silver (NYSEMKT: PZG  ) , with just a 5% gain year to date. Clearly, without that standout performance from Primero, my collective results would have fared far worse! Just as I was a year ago, I am at a loss to explain why the market continues to turn a blind eye to the meaningful shareholder value that Paramount has consistently generated through highly successful exploration activity at its two main properties in Nevada and Mexico. I urge Fools to review the company's phenomenal record of exploration successes during 2012, and consider whether this single-digit showing for the stock adequately reflects the corresponding expansion of Paramount's high-quality resource base.

Two shades of disappointment
Perusing the remaining eight stocks from my list that have each lost ground during 2012, they are each clearly a disappointment relative to the expectations I had going into 2012. But not all disappointments are created equal. In the case of AuRico Gold (NYSE: AUQ  ) , for example, my dissatisfaction is directed squarely at management's glaring missteps that culminated with the inexcusable sale of the company's former flagship Ocampo mine.

Meanwhile, on the complete other end of that spectrum, the 41% drubbing inflicted upon the shares of Sabina Gold & Silver (NASDAQOTH: SGSVF  ) year to date appears astonishingly at odds with the company's continued progress in advancing the high-grade Back River project toward the important pre-feasibility study due in early 2013. Accordingly, I have reiterated my bullish stance toward Sabina despite the profound retreat, and I continue to view this as one of the industry's best-kept secrets.

Somewhere in the middle, major miner Kinross Gold (NYSE: KGC  ) continues to suffer the legacy of prior management's infamous value destruction, even though new management has made convincing strides to turn over a new leaf. Ultimately, turning over a new leaf is precisely what the entire industry must accomplish if gold investors are to finally reap their just rewards for exposing their hard-earned capital to these inherently risky stocks. Although I believe the rampant cost escalation that has so challenged the miners' ability to convert gold price advances into meaningful profit growth is finally set to ease up a bit, investors must take extra care to select those operators that exhibit the strongest commitment to enhancing shareholder value through highly disciplined capital investment, stringent cost controls, organic resource and production growth, etc.

Even after back-to-back years during which investors seeking market-beating gains in the shares of gold miners have been subjected to widespread disappointment -- and notwithstanding my own personal sense of frustration with these stocks' collective failure to launch -- I remain steadfast in my contention that the well-selected stocks in this industry will ultimately deliver substantial long-term outperformance of every relevant benchmark as well as the broader equity markets. Accordingly, it is with an appropriate sense of humility and redoubled determination that I will soon finalize my list of top gold stock recommendations for 2013.

To stay tuned for my 2013 recommendations, please bookmark my article list or follow me on Twitter. In the meantime, enjoy The Motley Fool's in-depth analyst report on the superstar of the silver industry: Silver Wheaton.



Read/Post Comments (8) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 21, 2012, at 5:20 PM, TMFHelloNewman wrote:

    Looking forward to it, Barker! Time to find another precious metal play with the Primero takings...

    - Dan

  • Report this Comment On December 21, 2012, at 6:19 PM, charliedawgg wrote:

    Hey Sinch. It has certainly been a bouncy year! I've been trying to find out if you and/or speedybure have heard anything about Mutiny Gold way down in kangaroo country. There seems to be an amazing lack of info on them even though Sandstorm seems impressed enough by them. Thanxx as always, and we wish you all the best in 2013...assuming the Mayans weren't right...it's only 5:00 pm here in the south.

    Charlie

  • Report this Comment On December 22, 2012, at 3:46 AM, naturallyrose wrote:

    I don't recall you holding a gun to my head, so I take full responsibility for my purchases. I did far worse without you. I for one believe eventually all the money printing will catch up with itself and we will see a big turn around in gold and silver. I am betting our life savings on it. Now would be a good time to invest. Oppurtunities like this don't present themselves often. Thanks for all you do!

  • Report this Comment On December 22, 2012, at 7:19 AM, skypilot2005 wrote:

    Sinchi,

    #4 is throwing money at me to invest every other week.

    I am buying “Streamers” here.

    Why expose yourself unnecessarily to the escalating mining industry wide costs of traditional miners?

    Hopefully, you know I am not being negative or trying to take away from your well thought out reasoning. I am just saying that now may not be the time to buy miners verses Streamers.

    BTW, thanks again for Primero. I had a "ton" of it.

    Sold it and locked in a substantial gain. And, I mean substantial !

    Overall, I've had a nice overall return for the year in my portfolio thanks to you.

    Sky

    Your Official Web Link Assistant

  • Report this Comment On December 25, 2012, at 8:58 PM, skypilot2005 wrote:

    On December 21, 2012, at 6:19 PM, charliedawgg wrote:

    "Hey Sinch. It has certainly been a bouncy year! I've been trying to find out if you and/or speedybure have heard anything about Mutiny Gold way down in kangaroo country. "

    http://www.mutinygold.com.au/images/stories/121221_-_Letter_...

    21 December 2012

    Merry Christmas

    Sky

  • Report this Comment On December 26, 2012, at 10:03 AM, charliedawgg wrote:

    Thanxx Sky! That sounds encouraging, at least on the surface. I noticed that the shares took a dive shortly after the deal with Sandstorm was inked. I wonder if that was due to the "hedging vs. streaming" concern. Guess time will tell. Thanks again, and I hope you and yours have a swell holiday. Cheers and best regards.

  • Report this Comment On December 31, 2012, at 10:46 AM, pet123456 wrote:

    Chris Barker, your articles are no longer showing up via this RSS feed address where I used to get your latest articles. Last article to show up was December 11th. The RSS Feed address that isn't working is below,

    http://www.fool.com/feeds/authorheadlines.aspx?author=1632&a...

  • Report this Comment On January 04, 2013, at 4:05 PM, EllenBrandtPhD wrote:

    Anyone interested in PZG may want to buy some more before the presentation at the Dahlman Rose conference late next week.

    This conference has been a Gold stock "maker" in the past, if new analysts decide to initiate after presentations.

    I have not looked at the Treasury Auction schedule yet. But if it is a "Three Auction Week," the best time to buy PM stocks is generally Wednesday morning, hopefully down a bit. With Dahlman Rose on Wednesday and Thursday, this coincides beautifully with potential new buys of some presenters, if one is so inclined.

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