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If you're looking to profit from a long-term investment, you're probably not considering adding gold mining stocks to your portfolio.
After all, gold mining stocks lost about 50% of their value in the first half of the year, and a major gold mining exchange-traded fund, Market Vectors Gold Miners ETF (NYSE: GDX), was down more than 40% on the year as of Tuesday afternoon.
A headline on a July 1 Forbes story summed up the sentiments of many investors: "How Gold Miners Became a Terrible Investment."
And says Money Morning Chief Investment Strategist Keith Fitz-Gerald, "I could very easily make the argument that gold miners are unloved, undervalued and probably the worst investment of the year.
"But," Fitz-Gerald adds, "we know from history that's precisely the best time to buy. History shows you want to buy when there's blood in the streets."
Gold mining stocks are no exception, Fitz-Gerald says.
But you have to choose carefully when picking gold mining stocks or ETFs to buy. (And don't overlook junior miners, which search for new deposits of gold or other precious metals, targeting properties they believe have large deposits.)
Why Gold Mining Stocks Can Be "Hugely Profitable"
"To me, gold miners and junior miners in particular are a lot like junk bonds," Fitz-Gerald says. "A huge number of them are going to go bust and they'll never be profitable. But the ones that make it are going to be hugely profitable."
In fact, one ETF, the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), has begun a rebound in recent days and is up about 14.5%, or $5.52, to $43.58, in the past month.
And Money Morning Global Investing Specialist Martin Hutchinson says he's bullish on the precious metals mining sector.
"My favorite sector is currently as unloved as tech is loved," Hutchinson says. "Its operations are pretty simple, with a fair amount of heavy machinery but not much fancy technology involved. As an outside investor, you can determine fairly quickly which managements are ripping off their investors, and which are providing value."
Investors can pick mines whose production is increasing, rather than decreasing, and those that aren't subject to political risks and whose cash flow is protected from the effects of a sudden drop in precious metal prices.
Bernanke, the Fed and Gold Prices
"But the main reason for investing here," Hutchinson says, "is that with Federal Reserve Chairman Ben Bernanke and his international brethren keeping interest rates far below the level of inflation, and adding extra 'quantitative easing' at any opportunity, the current fiat money currencies have nowhere to go but down. In those circumstances, gold, and to a lesser extent silver, have nowhere to go but up."
Fitz-Gerald goes so far as to say he now believes it's essential to invest in gold.
"Ten, 20 years ago, gold was an optional investment," he says. "It wasn't suitable for Mom and Pop. But today, I don't believe it's optional. I think given the outlook and central bank meddling, it's a must-have."
Fitz-Gerald doesn't offer gold mining picks, but says, "To me, the easy decision is the ETFs. It levels it out. You get some trinkets with the trash."
If you decide on individual mines, he says, look for low costs of getting gold out of the ground, and a well-run operation.
Gold miners face inflationary, energy and labor issues and must obtain permits. And some big gold miners also have faced sharply declining margins – even when the price of gold was still rising from 2010 to 2012.
"Miners can be extremely problematic, so exercise caution," Fitz-Gerald says. "But to me the single biggest question is, Do they have experienced management and can they get gold out of the ground cheaper than they can sell it?"
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