Are Gold Miners Worth Investing In?

Gold mining stocks were hammered last year as gold prices fell almost 30%. Investments in gold fell as investors pulled money out of exchange traded funds. This was mainly due to the fact that the U.S. Federal Reserve indicated that it will start winding up its quantitative easing program. The Fed has already started easing its bond purchases this year, however, surprisingly gold and gold mining stocks have performed well. So are gold miners worth investing in after last year’s sharp decline?

Gold Mining Stocks Hammered

In 2013, gold mining stocks registered steep losses. Shares of Goldcorp (GG) , one of the biggest gold mining companies, tumbled almost 40%. Another major miner, Barrick Gold Corporation (ABX) fell nearly 50%. Newmont Mining Corporation  (NEM) also saw a 50% drop in its shares. The interesting thing is that the drop in gold mining stocks was significantly higher than those seen in gold itself. Gold fellaround 30% last year.

Gold and Fed

Gold prices fell in 2013, ending over a decade-long rally in the precious metal. The drop in gold was sparked by speculation that the Federal Reserve might start easing its bond purchase program, which is also known as quantitative easing.

The Fed first launched its quantitative easing program or QE shortly after the financial crisis of 2009. The first and second rounds of QE sparked a rally in gold. The third round of QE, which was announced in 2012, saw gold jump to an all-time high levels. However, in May 2013, the improving U.S. economy raised speculation that the Fed might start easing its bond purchases. The speculation was further fueled by comments from the then Fed Chairman Ben Bernanke.

This was enough to spark a sell-off in gold prices as investors pulled money out of ETFs.

Gold’s Surprisingly Strong Performance in Early 2014

The Fed began winding up its quantitative easing program in January this year. However, surprisingly, gold performed well in the first quarter of 2014. The precious metal was helped by the crisis in Ukraine, which boosted its safe-haven appeal. But, another major factor that helped gold was strong physical demand, especially in China.

The sharp decline in gold prices last year boosted physical demand for gold in China, which even overtook India as the world’s biggest consumer of gold. This factor has meant that gold now has a strong floor at around $1,200.

What This Means For Gold Mining Stocks

A strong floor for gold prices provides a great deal of stability to miners. In fact, miners are expected to generate positive cash flow this year. Not surprisingly, gold mining stocks performed well in the first two months of 2014. Their performance has since been disappointing; however, the outlook for gold mining stocks has certainly improved since last year.

This year we have also seen increased M&A activity in the gold mining sector. Earlier in the year, Goldcorp offered to acquire Canadian gold miner Osisko. Goldcorp had to eventually drop its bid for Osisko as the Canadian miner opted for a rival offer.  Another major deal that didn’t materialize in the end was the merger between Barrick Gold and Newmont Mining. The two companies had been discussing a merger earlier in the year; however, talks eventually fell apart.

It is likely that we will see more deals in the gold mining sector as the year progresses. This is because gold prices do not have significant upside as the Fed continues to ease its bond purchases. Any growth that miners will see will come from acquisitions that will boost production.

The big question then is whether after last year’s debacle are gold mining stocks worth investing in. Gold price has a strong floor now and miners have cut their costs. Add to this the fact that the sector could increase in M&A activity. Given these factors, the sector is certainly looking attractive again.