Blogs & Comment

Gold stocks selling at bargain prices?

Don't get caught up in the siren call to buy gold.

(Image: Manco Capac/Wikimedia)

Gold stocks are down more than 20% since September, prompting a number of analysts to label them as bargains. Other analysts, however, don’t see them as buy-on-the-dip opportunities. Let’s review the arguments of the two sides and see which make more sense.

Buy the dip

Larry Berman of ETF Capital Management observes that several large-cap gold stocks have made new 52-week lows recently. The upward path of gold and gold stocks over the past several years has been quite volatile, and “every dip to these prices has been a buying opportunity for gold stocks,” he says.

Frank Holmes of U.S. Global Investors points out that the price of gold bullion has rarely fallen below its 200-day moving average over the past 10 years—like it has recently. And when it does slip under this trend line, it doesn’t stay below it for very long—just an average of 10 days.

Real world events that could produce a rebound in gold and gold stocks include a reversal in U.S. dollar strength, ebbing signs of a U.S. economic recovery, and continuing growth in emerging countries. Meanwhile, central banks around the world continue to accumulate gold and real interest rates remain negative in many countries.

Don’t buy the dip

Many analysts are more optimistic about real world events. Signs that the global economy is finally moving away from the brink of extreme outcomes include stabilizations in the Greek debt crisis and U.S. housing markets, along with rallying U.S. financial stocks and other glimmers of recovery in the U.S. economy, such as falling unemployment. This easing of volatility means it’s a mistake to think you can buy gold now on the expectation of a sudden, or sustained, future price rise.

Others view the fluctuations in gold prices simply as non-events, nothing to be concerned about. Unlike productive assets such as businesses or farmland, gold is “purchased in the buyer’s hope that someone else … will pay more for them in the future,” declares Warren Buffett in an adaptation from his latest shareholder newsletter.

“This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further,” Buffett adds. “Owners are not inspired by what the asset itself can produce … but rather by the belief that others will desire it even more avidly in the future.”

I confess to agreeing with Buffett’s viewpoint. Trying to pick up a few bucks in the next upward squiggle in gold or gold stocks would be a distraction from the pursuit of real investing, namely the ownership of productive assets that can be expected to increase in worth over the long run. Gold miners might possibly be worth owning as producers of a metal for industrial and cosmetic uses, but their current levels of production go far beyond such requirements.