As Gold Loses Luster, Gold Mining Stocks Suffer

Matt is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I am writing this from the inner sanctum of my spacious central Pennsylvania bunker. The plan was that after the Mayan apocalypse or complete global financial meltdown -- take your pick -- I would arise with a cache of gold and portfolio of gold mining stocks to become a wealthy, benevolent-ish warlord.

Should I now switch to a plan B?

As a gold bug, I know that gold isn’t just for pretty jewelry and first-place Olympic medals, it’s an economic barometer. Proof of this is that while demand for gold hasn’t doubled, the price of gold has gone up 100 percent in the past five years.

While demand has increased, especially in places like India and China, many people buy gold as a hedge against inflation. It also has a reverse correlation with the U.S. dollar. Generally, when the dollar goes down, gold prices go up. If the dollar strengthens, gold prices weaken.

About a year ago, gold’s sprint to the top of the charts began to sputter. The price of gold slid from its highs and has since leveled off. As the price of gold began to slide, the future of gold mining stocks, which have been solid performers, started to look more bleak to analysts.

All of this can have an effect on your portfolio if you own stocks that derive a lot of their revenue from mining. Some of the companies that benefitted from gold’s rising prices, now may be vulnerable.

Let’s take a look at how some gold mining industry stocks are performing. You may see a pattern.

Shares of Newmont Mining (NYSE: NEM) fell from $70 in the first week of November to $45, where it is now.

NEM reported solid revenue of $10 billion. In 2009, the revenue was $7.5 billion. Despite the impressive revenues, the company has a sky high price-to-earnings (PE) ratio of 211. Net income dropped from $2.2 billion in 2010 to $366 million in 2011.

Like most gold and metal producers, NEM has faced price weakness, but also production problems. That may account for some of the climbing PE.

The price of Barrick Gold (NYSE: ABX) stock has also suffered from the gold meltdown, dropping from $45 a share early last year to its current price of $34. In one year, the company has dropped almost 30 percent -- something to consider.

With operations all over the world, Barrick is a biggie in the gold and copper mining industry. It raked in $14.2 billion in revenue and an operating income of $4.5 billion last year. According to their income statement, in 2009 the Canadian company lost about $4 billion, blaming the loss on “unwinding a gold hedge.”

Still, the company's PE is an impressive 10.

Goldcorp (NYSE: GG) has a 52-week high of just about $50 a share, but is trading in the $35 range recently. The Canadian company fell back right around the time gold prices started to falter.

In the past few years, revenue has soared. In 2007, the company earned revenues of $2.4 billion and in 2011, Goldcorp reported $5.3 billion. Likewise, operating income has increased from about a $500 million to over $2 billion.

It still has a great balance sheet and its current PE of 19 isn’t too shabby. The industry average is about 14.

The company issues monthly dividends to boot.

So what’s not to like about these companies? They have great revenue history and solid income. The stock’s prices have increased respectably.

My friends tell me I say “here’s the thing” too much, but here’s the thing:

It won’t take gold prices to drop like a nugget to affect mining stocks; all it will take is for gold prices to not increase as much as they have in the past to break some of the momentum. Once that momentum changes, investors may find the risk-reward ratio of other stocks to be preferable. If this happens, mining stocks will lag.

That all could change if there are some economic reverberations. The U.S. economy doesn’t seem to be booming and the global economy appears to be perpetually shakey. Most experts agree the fiscal cliff is still there, it’s just not on the front page headlines.

So, you may want to keep your eye on that. If this does cause uncertainty and people begin to rush into gold for safety, it’s time to revisit these solid-performing gold mining stocks.

And it will be time for me to head to my spacious bunker.

mlswayne has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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