The year 2012 is almost in the books; it was a brutal time for gold miners like Iamgold (NYSE:IAG) who've seen their share prices crater while gold actually increased in value.

1. Bubble news - The year 2012 is almost in the books; it was a brutal
time for gold miners like Iamgold (NYSE:IAG) who've seen their
share prices crater while gold actually increased in value. There's a
serious disconnect between the two and it's questionable whether
this will change anytime soon. As we head into 2013, I'll have a look
at what I expect will happen to gold stocks in 2013. | INVESTOPEDIA
By: http://www.bubblews.com/news/939657-tana-goldfields-news-what-will-happen-to-
gold-stocks-in-2013

2. Rising Costs. The big problem for gold miners is that they have to get the gold
out of the ground; the cost to do so keeps rising. Barrick's (NYSE:ABX) Pascua-
Lama project on the border of Chile and Argentina is full of hope and promise,
yet it has been hit by rising labor costs and much uncertainty. According to Pav
Jordan of the The Globe And Mail, the cost to develop Barrick's mine was
estimated at $8.5 billion in November. Only four months earlier it was $500
million less. That's a 6.3% increase. With the opening not expected until the
summer of 2014, development costs could easily rise to $10 billion by then.
That's one of the reasons why Barrick fired its CEO Aaron Regent in June. Costs
were getting out of hand. Unfortunately, for gold miners in general, it's a pretty
standard occurrence industry-wide. According to a Canadian bank, the all-in
cost to produce an ounce of gold is $1,500. Even worse, gold miners need the
price of gold to remain at or above $1,700 for a sustainable amount of time in
order to profit from their mining. Given the price of gold is currently around that
number, it doesn't leave a lot of wiggle room for investors. In the past five
years, Barrick's stock has lost ground while the price of gold has increased by
approximately 120%. While it might have 17.9 million ounces of gold reserves
at the one mine alone, if the cost to get it out of the ground keeps rising, only a
sustained run in gold prices will allow it to sufficiently profit from those
reserves. Therefore, the economic argument for investing in gold miners doesn't
appear sound.

3. Exchange Traded Funds. One of the
big reasons for the price of gold
rising in recent years is the
introduction of exchange traded
funds (ETFs) like the SPDR Gold
Shares (ARCA:GLD) and the iShares
Gold Trust (ARCA:IAU), which allow
investors to own gold bullion more
easily. Prior to ETFs, most people
would buy the stocks of big
producers like Barrick and Iamgold
benefiting indirectly from the rising
price of gold. When gold prices
increased the share price of gold
producers tended to follow suit.
Now, because investors are creating
increased demand for these
commodity ETFs, it's putting upward
pressure on the price of gold. The
big problem with what's happening
is that investors are no longer
buying an asset that's uncorrelated
with equities. It used to be if you
were worried about the
performance of stocks, you'd invest
in gold as the ultimate hedge.

4. Since 2009, the price of gold and the S&P 500 have moved almost in
lock-step with each other. Therefore, an argument can be made to own
the S&P 500 exclusively, eliminating any need for a discussion about
gold.
Poor Capital Allocation. At a recent conference in
London, BlackRock's (NYSE:BLK) chief investment
officer for natural resources, Evy Hambro, was highly
critical of the big gold mining companies. Hambro
feels they've done a very poor job investing
shareholder capital. Since 2006, gold miners have
increased their share count by 40% without
increasing volume or margins. That means they've
been spending billions on exploration with no
additional returns to speak of. In addition, Hambro
wonders why gold firms payout just 25% of profits
as dividends when oil companies are up around 45%.
At one time the average gold miner's stock traded at
a forward P/E of 30 to 35 compared to 15 for global
equities. Today, gold miners trade for less than
global equities. Exhibiting very little financial
discipline, it makes it hard for investors to justify an
investment in the producers themselves.

5. The Bottom Line. While it's clear the valuation of gold stocks like Barrick
are incredibly low on a historical basis, I still have to wonder if it's worth
placing a bet. Many analysts feel it's only a matter of time before gold
stocks participate in the growing popularity of the commodity itself. I'm
not so sure. I subscribe to the Warren Buffett theory about gold that
says it serves no useful purpose besides looking pretty. Eventually,
people will get bored of looking at it. And even if the price keeps rising,
there's no guarantee producers will be able to profit from the increase.
Therefore, I don't hold out much hope for a rally in gold stocks in 2013.
However, if you must place a bet, I'd do so with an ETF like the iShares
MSCI Global Gold Miners Fund (NYSE:RING), which is reasonably
diversified with 47 holdings including Barrick and is the least expensive
of its ETF peers at an annual expense ratio at 0.39%.