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Gold Miner Stocks Soaring as Gold Prices Rise: Here's What You Need to Know

By Jason Hall - Feb 11, 2016 at 1:49PM

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Several factors are behind gold prices climbing to start 2016, but that doesn't guarantee it will continue, or that gold miner stocks will make for winning investments.

What: Shares of almost every gold and precious metals miner are up double-digits on Feb. 11, following a big 3% jump in the price of gold on Thursday. Shares of Kinross Gold Corporation (USA) (KGC 2.50%)Eldorado Gold Corp (USA) (EGO 0.70%)Harmony Gold Mining Co. (ADR) (HMY 3.96%)Coeur Mining Co (CDE 0.28%)First Majestic Silver Corp (AG 1.00%) Gold Fields Limited (ADR) (GFI 2.10%)Yamana Gold (USA) (AUY 1.22%)IAMGOLD Corp (USA) (IAG 0.53%)New Gold (USA) (NGD 3.33%)Barrick Gold Corporation (USA) (GOLD 1.38%), and Silver Wheaton Corp. (USA) (WPM 1.47%) are all trading much higher Thursday, in a very down stock market:

KGC Price Chart

KGC Price data by YCharts.

So what: Thursday's big move is a product of gold prices, which are up more than 10% so far this year, and could continue to go up on rising macroeconomic uncertainty. U.S. stocks are down so far this year, and an ugly energy market continues to cause concern. Furthermore, numerous major economies around the world continue to struggle, and fears of global recession are playing a role in the surge in gold prices, as some investors flee the stock market and look for what they see as a more certain asset in gold.

Higher gold prices are certainly good for miners, but investors should note that much of the recent jump in prices is a product of investor sentiment, and short-term fear and uncertainty. This is very different than sustained consumer or industrial demand growth for gold, because it can turn on a dime:

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts.

As you can see in the chart above, gold prices have rallied in double-digit gains numerous times in recent years, and usually near a corresponding drop in equity prices, only to give those gains back just as quickly. Here's a closer look at gold prices against the S&P 500 over the past couple of years:

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts.

At the same time, none of these gold rallies has proven to be sustained, and almost all of the gold and precious metals miner stocks listed at the top have made for poor investments over the same period of time:

KGC Chart

KGC data by YCharts.

Now what: Gold prices very well could continue to rise from here, especially if the uncertainty around macroeconomic concerns turns into a bigger global economic slowdown and sends more investors flocking to the perceived certainty of the shiny gold stuff.

The problem? There's just no reliably accurate way to predict that this time will be any different than the handful of rallies in gold prices we have seen in recent years. And when you're counting on something as fickle as investor uncertainty to prop up gold prices, that's a pretty weak foundation for an investing thesis into any gold miner.

By no means is that an indictment of all gold and metals miners as bad investments -- not at all. But it most definitely is a strong advisement against investing in the industry simply because gold prices are up.

If you're truly interested in investing in gold miners, take the time to crack open a few SEC filings and get to know each business. Understand their costs, strategies, and how they make money. All gold miners are not created equal, and the only ones worth investing in are the ones that can make money in almost any gold price environment.

And those kinds of gold miners are very few, and very far between. 

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Stocks Mentioned

Barrick Gold Corporation Stock Quote
Barrick Gold Corporation
$19.04 (1.38%) $0.26
Gold Fields Limited Stock Quote
Gold Fields Limited
$9.74 (2.10%) $0.20
IAMGOLD Corporation Stock Quote
IAMGOLD Corporation
$1.89 (0.53%) $0.01
Yamana Gold Inc. Stock Quote
Yamana Gold Inc.
$4.98 (1.22%) $0.06
Kinross Gold Corporation Stock Quote
Kinross Gold Corporation
$4.10 (2.50%) $0.10
Wheaton Precious Metals Corp. Stock Quote
Wheaton Precious Metals Corp.
$38.76 (1.47%) $0.56
First Majestic Silver Stock Quote
First Majestic Silver
$8.09 (1.00%) $0.08
Eldorado Gold Corporation Stock Quote
Eldorado Gold Corporation
$7.16 (0.70%) $0.05
Coeur Mining, Inc. Stock Quote
Coeur Mining, Inc.
$3.52 (0.28%) $0.01
New Gold Inc. Stock Quote
New Gold Inc.
$1.24 (3.33%) $0.04
Harmony Gold Mining Company Limited Stock Quote
Harmony Gold Mining Company Limited
$3.41 (3.96%) $0.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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