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Stock Strategist

Four Gold Stocks to Avoid

We do not dig these four producers of the yellow metal.

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Gold prices have been skyrocketing recently, continuing the secular bull market in gold that started in 2001. After starting the year at $420 per ounce, gold prices have rallied to within shouting distance of $500 per ounce, levels not seen since the late 1980s. Not surprisingly, gold bugs feel vindicated, and the metal and its producers have been getting a lot of attention from the financial press and potential investors.

So, is this a time to invest in gold, gold stocks, gold mutual funds, or gold exchange-traded funds? My colleague Michele Gambera has some interesting thoughts on this subject. As value-oriented investors, we at Morningstar believe in buying assets at a discount to their intrinsic value and waiting patiently for prices to recover. The metal has been justifiably touted, though, as an inflation hedge and portfolio diversifier. However, gold stocks, while highly correlated with gold, carry additional baggage that may offset some of their diversification and inflation-hedge benefits. As I've written before, gold miners are plagued with rising costs, lack of control over the price of their product, and few product differentiation opportunities. It follows that most gold producers have no competitive advantage, or economic moat, and their returns on invested capital trail their cost of capital.

Parvathy Krishnan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.