Digging for a Bottom in Gold Miners

 | Apr 16, 2013 | 4:11 PM EDT  | Comments
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Stock quotes in this article:

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gld

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muc

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The gold miners have been lagging the price of gold for at least two years. In that time, the Market Vectors Junior Gold Miners ETF (GDXJ) is down 67%, while the SPDR Gold Shares (GLD) is down only 4%.

Some miners have been down even more than that. Take McEwen Mining (MUX), for example. It's down almost 80% in the last two years. For most of the last year, many questioned whether the miners were an early predictor of where the price of gold was heading or whether there was an opportunity to buy the miners at a discount and see it rally back towards the levels where gold was. After the last week, we seem to have our answer.

The question now is where the bottom is for these miners. Can the decline continue? It can continue to fall tremendously, of course, or at least bump along the bottom for a while. Unless you expect the price of gold to come rocketing back, I envision the miners as a whole to remain a depressed sector.

However, on a case-by-case basis, now is the time to make your shopping list of miners and put money to work. There has been a huge washing out just in the last week. All gold producers have been wiped out, junior miners even more so.

McEwen Mining is down 25% just in the last five trading sessions. I'm going to be sitting down with CEO Rob McEwen in a couple of days and I'm looking forward to it. His company is one of the more interesting ones where the baby has certainly been thrown out with the bathwater. I like Rob McEwen, not just because he has "been there, done that" in mining (taking Goldcorp (GG) from nothing to $10 billion back in the 1990s), but also because he owns 25% of his company and pays himself no salary. That owner's mentality is a welcome change for the junior mining sector that hasn't always been so shareholder friendly.

There doesn't have to be a huge recovery in the price of gold for these junior miners to see their price move up a lot in a short period. Goldcorp had its huge increase of value in the 1990s, when the price of gold per ounce only went up $50 to $400 an ounce. What is important is to continue to prove out your reserves as a company.

Junior miners of course can be hit negatively when the price of gold stays normal. However, with the beating this past week, a lot of downside risk has already been drained out of the market. Just pick your junior miners carefully.

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