Is It Time To Cut Your Losses On Senior Gold Shares?

A little over a month ago I told you that “patience will be the key” with senior gold miners.

Well, with a batch of poor earnings announcements, my patience is wearing dangerously thin with companies like GoldCorp (GG: NYSE), Newmont (NEM: NYSE) and Barrick (ABX: NYSE).

So is now the time to cut our losses on these miners? With disappointment over the past year-and-a-half reaching a crescendo, let’s take a look…

Our focus on the senior gold miners began last year around this time when there was a strange anomaly in the gold-o-sphere. Gold prices were skyrocketing higher and miners weren’t following. Over the past 12 months you’ve likely heard us talk about this “gold gap.”

So why was there a gold gap? Simply put miners couldn’t control costs. And when you can’t control costs, the price appreciation in gold gets nullified for shareholders.

That’s why a little over a month ago I told you about the most important gold chart I’ve seen. All said, the chart showed that gold miners “cash costs” were deceivingly low, while real costs were skyrocketing.

That’s not something you want to see as a shareholder — even the most bullish gold forecasts could still get burned in that scenario.

But back then, I said patience was the key. We needed to see if senior producers, now under the microscope, can fulfill on their cost cutting promises.

A month and a half later, I’ll let you be the judge of that:

“Barrick Gold Profit Falls on Higher Costs”
   - Wall Street Journal, July 26, 2012

“Goldcorp profit falls on operational woes”
   - Reuters, July 26, 2012

“Newmont Gold Quarterly Profit Misses Estimates as Costs Increase”
- Bloomberg, July 26, 2012

Man oh man. The print papers could have had a field day with these boilerplate headlines.

“[Company name] profit falls on [such and such higher costs].”

Heck, at least the senior gold miners are saving costs somewhere. Only instead of saving cash at the ore deposit, they’re saving money at the WSJ letter shop!

All kidding aside, our patience has not paid off. In fact, waiting around for these senior producers to lower costs has turned out to be a sucker’s bet.

But is now the time to part ways with our senior shares?

Well, I certainly don’t like selling at a point when market capitulation could be at its highest point. These miners are beaten down and the cats out of the sack on uncontrolled costs.

Again, I’ll suggest patience through this latest round of earnings. Mining shares could still turn around — and lending management only a month or two to cut major costs isn’t easy. Heck, Barrick is only about a month and a half into their new CEO, after ousting the last one for uncontrolled costs.

So let’s give the management some time to work, and now part ways at this price trough.

The “Other” Way To Profit From Gold…

Luckily, besides patience, there is one simple takeaway. You should make sure you have direct exposure to the other side of gold investing: the physical price of gold.

When it comes to your gold portfolio, an even balance of price exposure (50%) along with senior shares (25%) and junior shares (25%) is the way to go. I say “price exposure” because depending on your particular circumstances you may want to hold real-life physical gold or you may want to play gold’s upside with easier to trade ETFs.

Frankly, for all of the flak that the SPDR Gold Trust ETF (GLD: NYSE) gets, it’s important to remember it has NEVER failed and an investment instrument. Put simply, over the past 5 years when gold rises 5%, 25% or the actual 5-year return: 131%, the ETF follows.

And whether you choose physical metal or shares, now’s an important time to look at gold.

Gold prices look set to rise from their recent consolidation. Consolidation, as I told you earlier this month, is the penultimate step to a breakout move. Think of it like a tightening rubber band. As the trading range gets tighter, the chart waits for a breakout — and slingshots higher.

Today, gold prices are trading on the high side of their range, at $1,620 — and we could be in for a big move higher.

You’ll want to have exposure to this move and not leave everything in the hands of cost-cutting CEOs. Simply put, I’d for you to miss out on gold’s next big move while senior producers get their act together.

Keep your boots muddy,

Matt Insley

Is It Time To Cut Your Losses On Senior Gold Shares? was originally featured in The Daily Resource Hunter. Check out the newest Daily Resource Hunter research video “The Price of Gas Explained”.

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