Gold Stocks At Bargain Levels?

That's the opinion of Georges Lequime, who works for Earth Resource Investment group and is the co-manager on the Earth Gold fund. Although gold itself has gone up strongly in the last several years, some of the major producers haven't done so well.

Even with high working cost inflation at mining operations around the world (due to the mining of lower grade material, currency rates against the US dollar and higher fuel and reagent prices), record profit margins are being reported quarter after quarter.

Interestingly though, record profits do not necessary equal record returns. Over the past five years, investors would have made little or no money investing in the world’s largest gold producers despite their profits surging 2-300%. If you bought Newmont Mining in 2006 (when the gold price averaged US$604.27 per ounce) for $57.62 per share, your return to today would be -3.6%. The same is true for returns on investing in AngloGold Ashanti (-10.9%), and Gold Fields Limited (-35.6%) over the same time period. Although you would have made money investing in Barrick Gold (+37.6%), Kinross Gold (+17.4%) and Goldcorp (+8.1%), among the larger capitalisation names, these are hardly the kind of returns that you are going to tell your grandchildren about.

The majors' troubles actually add to the case for physical gold. As long as producers see their revenue increases eaten up by cost rises, they won't have much incentive to invest more in added production (particularly in low-grade projects.) That reluctance will keep new supply from entering the market, leaving existing supply to meet any demand increases.

Lequime explains the sag in gold as in part caused by hedge funds shifting to industrial metal like copper, as those metals are more tied to the business cycle and would presumably benefit more from economic recovery.