Gold stocks are back.

That’s what many analysts are saying right now.

From December 16 to January 20, shares of the benchmark Market Vectors Gold Miners Fund (GDX) soared 34%. That’s a remarkable run in a short time.

Even with the recent pullback, shares of GDX are still up more than 18%. And many expect gold stocks to head higher.

But before you dive into the sector, there’s one important thing to know about gold miners today…

Many gold miners are losing gold reserves (gold in the ground that can be mined for a profit).

[ad#Google Adsense 336×280-IA]For example, global gold miner Eldorado Gold produced nearly 800,000 ounces of gold in 2014.

But its gold reserves fell by 1.8 million ounces.

That means 1 million ounces of gold – more than a year’s production – just disappeared.

Eldorado isn’t alone.

Giant gold miner Barrick Gold’s gold reserves fell 11.1 million ounces last year. But it only produced 6.2 million ounces.

Goldcorp’s reserves fell 4.8 million ounces, while it produced 2.9 million ounces. And Kinross Gold lost 8.4 million of its 42.8 million 2013 gold reserves.

This is a real problem. It means the fundamental value of these companies – their gold in the ground – is disappearing. In short, over time, these companies won’t be able to produce as much gold as they thought they could. And the companies won’t earn as much money as they thought they would.

So why are so many reserves disappearing?

The short answer is the price of gold.

As I said, gold reserves are the amount of gold in the ground a company can mine for a profit. With gold prices at around $1,200 today, many gold producers’ mines are losing money on every ounce of gold they produce.

For example, in the fourth quarter, South Africa’s Harmony Gold Mining had all-in costs (the total cost of its production) of $1,262 per ounce.

And when a mine becomes unprofitable, the gold is no longer included in a company’s total gold reserves.

Giant gold producer Newmont Mining recently gave an example of how this works in a press release.

Newmont used $1,300 per ounce of gold as the base gold price to calculate the reserves at all of its mines. It said a $100 increase in the gold price (to $1,400) would cause its gold reserves to increase by 4% – to about 86 million ounces. Conversely, a $100 decrease (to $1,200) would cause reserves to fall 13% – to about 72 million ounces.

As you can see, the results are not proportional. Newmont’s reserves fall much faster than they rise with a $100 change in the gold price.

This is likely because Newmont has a mine (or several mines) that produces about 10 million ounces of gold at a cost of more than $1,200 per ounce. Since gold has fallen below the cost of this mine’s production, its reserves are no longer counted in Newmont’s total – even though the physical gold is still there – because the company can’t mine the gold for a profit.

And if gold prices stay at or below $1,200 for a long time, Newmont might even consider closing the mine and losing those reserves for good.

So be careful about which gold miners you buy right now. Low gold prices will continue to affect the reserves – and value – of miners with high production costs. I recommend looking into companies with production costs below the price of gold today.

Good investing,

Brian Weepie

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Source: Growth Stock Wire