Some investors who bought gold in the past year are wondering if their losses will get worse.
While the price of gold itself is down about 22% this year, gold mining stocks have performed much worse, some down 50%. Gold miners spent a lot of money in the 2000s buying assets to improve gold production, but with slumping gold prices, these companies are now just trying to survive. Investors who are considering buying gold or gold stocks should be very careful. Gold can be a higher-risk play than investing in stocks. If the U.S. economy continues to grow and inflation remains tame, gold prices may remain flat for a while.
Shares of Barrick Gold (NYSE:GOLD) fell 6% Friday after announcing that it is going to dilute shareholders by selling $3.45 billion of shares for $18.35 each.
Barrick Gold shares were down 48.53% year to date through Nov. 1. Its quarterly dividend was cut to $0.05 cents on Aug 8, down from $0.20 cents on May 29.
Gold is considered a hedge against inflation, but inflation is fairly tame right now, and other assets, such as the S&P 500, have provided much higher returns.
Gold, like oil, is a commodity. Commodities are subject to the whims of supply and demand in worldwide markets. India, which consumes 20% of the world's gold, is not expected to consume as much gold in the fourth quarter as in the past, according to CNBC's Seema Mody. She says rising inflation, a depreciating rupee and a high import tax on gold contributed to India's gold slump.
A popular gold ETF, SPDR Gold Shares (NYSEMKT: GLD) was down 22% year to date through Nov. 1 compared with the 23% return of the S&P 500. The ETF does not pay a dividend.
Billionaire hedge fund manager Seth Klarman disclosed holding gold stocks Yamana Gold (NYSE:AUY) and Kinross Gold Corporation (NYSE:KGC) in his Baupost Group holdings on June 30. Perhaps Klarman sees a bottom in gold stocks and a margin of safety if he is wrong. Yamana Gold was down 20% over the past six months and down 44% year to date. Kinross is down 10% in the past six months and down 50% year to date. It will be interesting to see how Klarman's holdings change in his next quarterly report called a 13F.
Yamana Gold reported a 28% decline in third-quarter profit, due to lower realized commodity prices and lower earnings from the company's stake in the Alumbrera mine in Argentina. The gold miner reported a net profit of $43.5 million, or 6 cents a share, compared with $60.0 million, or 8 cents a share, in the year-ago period.
Kinross Gold will report third-quarter results on Nov. 13.
I would hate to be dependent on the price of gold going up in order to make money. Bad economic and political news can raise the price of gold, but not always.
Warren Buffett doesn't like gold because it is a non-productive asset. He prefers to own businesses like See's Candies and Coca-Cola, which buy commodities and turn them into edible products that are sold around the world. He believes stocks are a safer investment than gold.
When I was a boy, my grandfather, a businessman who lived through the Great Depression, took me out to coffee with him occasionally. When we walked by the commodity broker's office, grandpa would always say, "stay away from commodities."
My grandfather's advice has served me well. Commodities for investment purposes are a higher-risk play than I'm willing to accept. Money not lost is money ahead.
The bottom line
Investors may want to be cautious about investing in gold. If the U.S. economy continues growing at 2% annually and inflation remains tame, the price of gold may remain flat. Take the uncertainty out of the gold trade by staying away from it. Consider buying stocks that have a history of returning value to shareholders in the form of dividends, share buybacks, and possible stock appreciation.