Gold Stocks: Too Volatile To Buy or Sell at Their Exquisite Moment

16 October 2008

Another brief post.

The TSX Global Gold Index (SPTGD) has just collapsed to another multi-year low against a background of almost perfect fundamentals and a general market panic. At an index value now below the psychologically significant 200 level, the SPTGD index is revisiting early 2002 levels - at which time gold was still sitting flat in the $300 per ounce range.

Gold is now 3 to 4 times higher, but the Toronto gold stock index can't follow its lead.

In fact, the ratio of the SPTGD index to the gold price is now lower than when gold traded at its then 30-year low of $255 per ounce.

What then are the positive fundamentals?

The gold price is holding strong and pointing upwards in a global environment of massive reinflation (coordinated government liquidity injections - read "fantasy cash") in order to rescue the world's moribund banking system. Gold does best when the money supply increases, and the world has probably never seen a multinational money supply increase such as that at present.

The costs of gold mining are falling rapidly against a background of anticipated international recession, during which it is expected that energy and materials costs will fall due to tepid demand. Wage pressures will also be weak under such circumstances, as job security is now also less certain.

Finally, the cash crunch that has been hurting the small miners and explorers for years is likely to be averted by world governments' costly decision virtually to guarantee bank reserves and loans so as to keep the banking system operating.

On the other hand....

Global market panic is forcing all stocks to be sold, and the stocks of precious metal miners are among the weakest across the board (probably due to their recent favour among leveraged speculators). Additionally, fund investors everywhere are seeking redemption of their invested cash, forcing fund managers to sell even their prize holdings.

Result - there is no reason to sell gold mining shares. Their fundamentals have literally never been better.

But... You also can't buy gold mining shares, because the market is too volatile and uncertain. We simply don't know when the forced selling is going to end.

The fact that some of the miners are now selling for less than their cash in the bank, not to mention at ridiculously low price-to-earnings metrics simply doesn't matter (consider Yamana Gold at a P/E ratio of less than 4:1!).

Stocks tend to fall to P/E ratios in the 7:1 range during depressions - and the gold stocks are in some cases running cheaper than that on anticipated forward earnings (which, due to positive fundamentals, can very easily be higher than presently estimated).

Gold mining is presently the best business in the world, but buying and selling gold mining shares is nonetheless an exercise in futility.

What can be done?

We'll just have to wait and see how long the forced selling of the best quality assets in all the world is going to last.

Sorry, nothing else I can say or do. I'm on holiday, and I'll be thinking of other things until the market returns to sanity.
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