More Money Less Gold

“A rising gold price, however, is no guarantee that gold stocks will rise,” notes Chris Mayer, highlighting a bitter reality to many long-term gold investors.

“If you look at the Amex Gold Bugs Index, for example, it’s pretty much where it was two years ago, even though gold has recently made a new all-time high. Gold miners as a group struggled with rapidly rising costs. So even though gold prices rose, they didn’t make much money. This only serves to highlight that there are other reasons to like gold stocks that have more to do with the economics of the businesses themselves and the price paid for them.

“Here’s one pictures that tells an important tale: A rising gold price means we should see more gold produced. That’s basic economics. In fact, miners have invested increasing amounts to gold exploration. But importantly, the number of new discoveries continues to fall, and is rather anemic.

“This a familiar pattern in the resource world in recent years. It’s no different in the gold market. Big discoveries are rare — and more expensive. According to data from Sandfire Securities, a typical gold mine development might go like this:

“Exploration, three-seven years and $15-50 million. Evaluation may take another three-five years and another $20-30 million. Development could take another two-four years and from $50 million to over $1 billion in costs. Finally, you’re ready to operate the mine.”