Are You Aware Of The Risks With These Gold Mining Stocks?

Earlier this morning, the Business Times had published an article by Anita Gabriel on three gold mining stocks that are listed on the Catalist board, namely, CNMC Goldmine Holdings Ltd (SGX: 5TP), Anchor Resources Ltd (SGX: 43E), and Wilton Resources Corporation Ltd (SGX: 5F7).

The article had touched on the trio’s strong share price gains yesterday; CNMC Goldmine, Anchor Resources, and Wilton Resources had climbed by 16.2%, 16.7%, and 3.75%, respectively. Gabriel had written that the three stocks “have been given a fresh impetus of late thanks to a gold rally as investors zoom in on safe-haven assets amid renewed “Brexit” anxiety.”

Indeed, stock market participants have been giving the three stocks plenty of love in recent times. Over the past month, CNMC Goldmine’s shares have nearly doubled in price, Anchor Resources’ stock price has surged by 35%, and Wilton Resources’ shares have put on 40%. In the same timeframe, the price of gold has climbed by around 10%.

For me, all the data points above serve to highlight the strong possibility that some investors are rushing into the three aforementioned stocks only because they think that the price of gold will continue to rise. I think such investors are playing a very dangerous game for two reasons.

First, trying to guess the movement of commodity prices – both over the short- and long-term – is a very tough thing to do. Here’s a good example. In 2014, The Washington Post carried an article on oil, stating (emphasis mine):

“Just 15 years ago, most oil analysts predicted that crude would stabilize around [US]$20 a barrel for the foreseeable future, arguing that this was the magic price the Saudis — and OPEC — would target. The 2000s proved that spectacularly wrong: Oil prices rose nearly 15-fold in less than 10 years while Saudi Arabia did little to respond.”

Second, even if we assume we can correctly guess that the price of gold would rise strongly a year, five years, or even 10 years from now, that does not mean that gold-mining stocks would automatically be great investments.

History has good lessons here. In the 10 years ended September 2015, the price of gold had climbed by nearly 10% per year in Australian-dollar terms. But, the S&P / ASX All Ordinaries Gold Index had fallen by around 4% annually over the same period. The index is made up of the stocks of small Australian gold miners.

A Fool’s take

It’s a fool’s game (lower ‘f’ fool!) to try and guess what commodity prices would do. But even more importantly, it’s worth noting that there can be a wide gulf between a positive macro-trend and positive stock price gains.

High production costs, mining accidents, poor mine selections, debt-crippled balance sheets, and more can stand between a gold mining company and solid returns for its stock in the future even in the event that gold prices soar from here.

Investors who are interested in CNMC Goldmine, Anchor Resources, and Wilton Resources may want to keep these in mind.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.