Saturday, April 5, 2014

Gold miners

Gold-mining stocks have dropped a lot over the past two years but they're still bad investments. These stocks have numerous problems, including but not limited to awful management, awful cashflow, and uncontrolled cost inflation.

Bulls often say that mining stocks are much cheaper, relative to the price of gold, than they've been in the past. John Hussman has frequently made this argument. The flaw with that reasoning is that for most of the past 25 years, the price of gold was much lower than it is today. Since the price was so low, people could value the miners off hopes and dreams about how much money they would make when the price of gold went parabolic. It's since gone parabolic, but the miners still aren't making much money, so people can't value them off hope anymore and have to face the poor fundamentals.

Another big issue is that gold is clearly a bubble–the price of gold has risen much faster than the prices of industrial metals, which are themselves very bubbly. (I'll have a separate post about that soon.) Gold went up for ten straight years, and that attracted a lot of momentum investors, but because gold is considered a safe haven, these people didn't think of themselves as momentum players. In reality, if one wants a safe haven, one can't hoard the things that everyone else is hoarding. A speculative investor base is inherently dangerous and unstable, and the fact that most of these people don't realize they're speculators makes it even more unstable.

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