With the world's central bankers printing money like mad, you would think investing in gold mining stocks would be a no-brainer.
Yet despite these misguided policies, the Market Vectors Gold Mines Index (NYSE: GDX) is down 40% from its peak last September. Even worse, it's off 48% from its all-time highs in 2011.
Not even last Thursday's announcement that the Bank of Japan would buy $1.4 trillion in Japanese government bonds in 2013 and 2014 helped much-even though on a relative basis Japan's "stimulus" is more than double what Ben Bernanke has in mind.
So why all of the pain?...
And better yet, which gold mining stocks have fallen so far they are screaming buys right now?
Here's the answer to both questions....
Why Gold Miners are Down Right Now
First, there's the recent decline in gold prices. At today's price gold is close to 20% below its peak in the fall of 2011. In this case, it is simple: Lower gold prices = lower mining shares.
But even that doesn't quite explain the disparity between gold miners and the precious metal itself. The fall in miners' share prices has been much more pronounced than that of gold.
And it's not just their greater leverage to the price of gold that's responsible. Even in periods when gold prices have stabilized or shown moderate strength, gold mining shares have tumbled.
So what gives? The truth is not all gold miners are alike.
In fact, a substantial chunk of this can be put down to ineptitude and shareholder-unfriendliness among the mining companies themselves. For some, there have simply been too many equity raisings at fire sale prices. Too many new projects have run way over budget and resulted in existing shareholders being diluted to hell.
Take the Mount Milligan project of Thompson Creek Metals (NYSE:TC), for instance.
Because the project ran about 100% over the budgeted cost, the company was compelled to sell more than 50% of its projected output to "gold streaming" companies for a low price. It was then forced to carry out repeated dilutive equity issues which hammered the price.
Now even though Mount Milligan appears to be on track to open in September, TC shares are still standing at one quarter of their level two years ago.
Another problem for gold mining stocks is political risk.
Pan American Silver Corp. (Nasdaq: PAAS) for example, not only has almost 20% of its current production in Argentina, its largest capital expansion project in that country has been blocked by the regional government.
Likewise, Yamana Gold Inc. (NYSE: AUY) has an exciting $8 billion project located on the Argentina-Chile border. The problem is Argentina recently began blocking capital exports and has already nationalized a number of companies.
And since mining projects require a massive commitment of capital before resources start to flow, and are relatively cheap and easy to operate once the capital has been spent, committing shareholder resources to the tender mercies of Argentina's Cristina Fernandez is not something anyone should risk.
Then there's plain old cost escalation.