Depending on where you look on the web, you’ll find a different average cost for miners to pull gold out of the ground. Whichever amount you choose to believe, you can fairly estimate that gold is currently selling at or below the cost to mine it. Thus, the miners are not likely to be profiting. Hence, their stock prices are currently trading at a significant discount (see my article on Why stock prices for mining companies can go so low).
I like the miners because when the price of their respective commodity drops significantly, they can scale back operations and go into more of a survival mode, by cutting production and lowering expenses until the commodity price starts to re-elevate. Once the commodity hits a price that becomes more profitable, they can kick things back into high gear while having learned a few lessons in efficiency due to the downturn. Their biggest objective during the downturn is make their debt payments.
And that’s why I like holding ETFs over individual gold stocks. Since I don’t have the time to investigate each of the miners and learn how each manages its debt (as well as many other business factors), I know that by buying an ETF, I’m buying the average. Some companies will do well, and some will not do so great.
In fact, some companies will do so poorly with their debt that they may go out of business. Since the actual mine is the collateral of the loans, what is likely to happen should a miner go out of business?
Well, the debtor would come in and foreclose on the property. But the debtors can’t do anything with those mines as they are in the lending business, not the mining business, so they would just turn around and sell the mine to another mining company (or more realistically, one of the better managed miners will first step in and buyout the company/debt for a discount).
Thus, if you are in an ETF that holds many mining companies, you are likely to get that mine back through another company in the ETF. So it sort of all comes out in the wash, which is another reason why I like holding an ETF over an individual stock at this point in my life (see about me page). For every company that significantly under performs, another company is likely to significantly outperform. You do give up the chance for even greater gains but you gain security of knowing you didn’t pick a catastrophic company (see my article about knowing your risk tolerance.)
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