Good Time to Go to the Gold Mine

Looking for a quick way to make a buck after the election? The Powershares Market Vectors Gold Miner ETF (GDX - commentary - Cramer's Take) is a portfolio of global mining companies that have done quite well in the past few weeks.

Earlier this year, gold was over $1,000 an ounce. Now it is about 25% off of its peak. Miners' share prices are amplified when compared with the price of gold. The miners in this ETF include Barrick (ABX - commentary - Cramer's Take), Gold Fields (GFI - commentary - Cramer's Take), Newmont Mining (NEM - commentary - Cramer's Take) and Randgold (RAND - commentary - Cramer's Take). Though gold is only about 25% off of its high, these stocks are on average 61% off of their highs.

Every dollar move in the price of an ounce of gold can add or subtract millions of dollars in profits for miners. Miners need gold to be above a certain price to even break even.

Looking at Barrick, its cash cost to extract an ounce of gold is $318. Needless to say, when gold is $900 an ounce, mining it is a heck of a lot more profitable than when it's at $700 an ounce.

Miners have seen their costs escalate. The resources to run a mine are enormous: labor, electricity, costs to lay roads to remote places. These costs have all dramatically risen. Recently, though, these costs have relaxed. In a shareholder presentation, Barrick showed that its cost of oil has dropped, steel has dropped from $525 to $230 a ton, and sulfuric acid, which is used to separate metals from ore (rock), has fallen from $400 to $200 per ton.

South Africa, which is one of the largest gold-mining countries in the world, has had problems in the past with electrical blackouts. The elevators that carry miners and ore in and out run on a tremendous amount of electricity. No electricity, no gold.

Buying these individual miners is a double-edged sword. Your profits from stock movements can be higher, but your risks are higher too. An announcement such as a mining accident can send a stock's shares plummeting.

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At the time of publication, Osborne had no positions in the stocks mentioned.

Holmes R. Osborne III is a private money manager, founder of investment newsletter StockRoyalty.com and frequent author of financial columns. He has a degree in finance from the Martin J. Whitman School of Management at Syracuse University and is a CFA charter holder. Osborne is a member of the Pacific Council on International Relations, Malibu Rotary, Business Forum International and was formerly on the board of the L.A. National Association of Business Economists. He spoke this year at the fifth annual Value Investor Conference.