Monday, April 25, 2011

Gold Mining Investors Hate Record Highs in the Gold Price - Huh?

25, 26 & 27 April 2011

Gold mining investors absolutely hate new record highs in the gold price. Every time gold moves to a new high, the gold mining shares plummet.

I understand why. It's because the investors who accumulate gold stocks think gold is too high and has to go back down again.


If that's the explanation, though, what (the heck...) are they doing investing in this sector???

Case in point. Gold soared to a new record high in the $1518 range overnight. As is so often the case, it was sold off in New York (that is a recurring pattern too).

But as I write, the gold price is doing just fine, acting quite comfortable in the $1500 range. And last week, people seemed to think $1500 was a pretty high price for gold. (In 2008 and 2009, they though $1000 was pretty high, and so on and so on, back to $300 in 2002, which seemed like quite a lot at the time also!)

So what did gold stocks do today, as indicated by the HUI Gold Bugs Index?

They sold off hard. Every time this happens, a text box pops up above my head with one word in it:

How, then, are gold stocks looking relative to the gold price? Here is the ratio chart, using the GLD ETF to create an intraday chart.

Hmm. This looks really bad - trending sideways, and actually falling when the gold price climbs!

Well, perhaps it's not as bad as it appears. It does seem that investors are willing to dip their toes back into the market when gold holds at new prices for a few days. It's just a very skittish crowd, for reasons I don't totally understand.

Of course, this broad behavioural pattern has actually caused gold mining shares to underperform the gold price since 2006.

So, yes, you can still buy gold shares very cheaply, relative to the cost of gold, which, surprisingly enough, is what they happen to produce and sell - the better ones in increasing quantities and with rapidly rising profit margins... making gold mining more or less the most profitable business on the planet at this particular juncture in history.

However, at some point this pattern will change, and cheap gold stocks will no longer be readily available.

For the holdouts in the crowd, I'm warning you now.

You are getting gold stocks at a steal. Enjoy it while it lasts, because, hey, it's not gonna last forever!

And think about this: When the gold price sets new record highs - for example - for the last ten years in a row, that might be a reason to hold gold miners, not sell them!

So, why not buy and hold gold mining stocks now? It's just a thought on my part....

Looks like it's been a good idea for the past ten years.

Have you ever noticed how, when a trend sets in motion, it just tends to keep going that way?

Seems to me we might have some kind of trend going on here! So... why not stick with it?

26 April 2011:

Here's an update for you.

Gold, in my opinion, had an uneventful though somewhat lower day (after all, it's a bit hard to trade higher every time an all-time record high has been achieved...):

Gold stocks of course, were smacked down for the second day:

And HUI:GOLD, the ratio chart, is back to valuing gold miners - relative to the gold price - about where they were in late January, when gold was trading $200 lower, in the low $1300s.


Let me do the math for you. When the gold price is $200 higher, gold miners make more or less $200 more in profits per ounce of gold sold.

That is, if math is tough for you - as it obviously is for most gold mining investors, then at this level, the miners' margins might be up by, say, 25%.

Let me explain.... Suppose their production costs are $500 per ounce - it can vary considerably, from $0 to $800 or so. Then from late January to late April this year, the miners' profit per ounce of gold sold has increased from something like $800 per ounce to something like $1000 per ounce.

So, independently of the gold price, the miners should trade on the order of 25% higher now than they did in January. In this case, that would constitute a rise in the HUI index from the bottom-feeding 492 in January 2011 to a still undervalued 615 today (the HUI actually closed today at an absurdly low 574).

Let me tell you now - this logical increase in the market value of the gold miners is systematically not happening! The gold miners have lost traction as the gold price has risen for the past 5 years, just as has occurred over the past 3 months, with an additional 33% underperformance from already undervalued levels!

So long as mining company investors go running for cover - like cockroaches under an upturned rock - every time the gold price drops from a new high, that pattern is not going to change!

I guess a smart speculator could play this game for profit, just by going short the miners every time gold sets a record high.

In fact, I'm going to guess that some do, as many commentators on Eric King's program have been maintaining (Dan Norcini and others, for example)!

Shorting the investment sector I believe in more than any other is contrary to my ethics, but what an easy way to make money for the past 5 years!

27 April 2011:

OK. Anywhere around $1500 is a perfectly fine gold price for now. Watch out, as we're setting yet another new record high in gold.

It would be nice to see gold stocks respond positively to a record high in the gold price for once. They are still below last week's levels.....

If that occurred, it would be a watershed event!

Oh, Ben Bernanke is speaking now. The first news conference ever for a Fed Chairman. I disagree with every Fed policy and every statement he makes. However, I admire his courage in attempting to make the Federal Reserve and its policies more open and understandable to the public. That single decision on his part is entirely admirable, and increases my underlying sense of hope for the future.

That is, I believe Mr. Bernanke is wrong about literally everything, but I have total respect for his openness and directness.

You can't help but notice Mr. Bernanke's voice shaking from time to time. He is a courageous and well-intentioned man who is really trying to do a good job! Oh, by the way, his job is probably impossible. He can't fix everything by himself. For example, you'd need a few committed politicians. And how can they do it if the citizens themselves are not willing to take the road less travelled?

You need an entire people working together to respond to a crisis of the present proportions. I hope that will happen one day. But, unfortunately, today is not that day. Almost everyone still wants the easy but short-term solution with higher long-term costs!

Post-News Conference comment:

Hmmm. Mr. Bernanke and I agree on one important point. He stated that the US Federal budget deficit is "unsustainable," and that US Federal debt is "our most serious problem." Wow! That is exactly correct.

Obviously we have different ideas about how to respond to that problem, but yes, we are all looking at the same problem.

Mr. Bernanke was somewhat happy about the S&P downgrade of US debt (S&P warned that its rating of US debt may fall below an "AAA" credit rating, which would drive interest rates powerfully upward!). Obviously Mr. Bernanke hopes that something will get the politicians (and public) moving, so he won't have to do the whole job by himself - which, as we have discussed - he can't possibly do in any case!

As to the gold price, it is soaring on an intraday basis, higher still post-news conference. Somebody somewhere believes that inflation is going to continue....

Are you surprised?

Jim Sinclair's $1521 gold price target was met (and surpassed) today. It hovered at that level following the Fed announcement (due to a promise of continued dovishness in a situation where something entirely different is obviously needed), and the gold price moved over the $1521 level following the conference with Mr. Bernanke. Note that $1600 seems to be the next stop....

Mr. Bernanke still believes that he can act effectively when long-term inflation expectations get out of hand.

Just a small caveat on that one.... We are long past that point, and Mr. Bernanke has obviously missed this critical historic juncture! Pandora's box was actually opened back in 1987, when Alan Greenspan took over the chairmanship of the Fed. That is an event that has been unacknowledged for the past 24 years!

Oh, the question I would have asked... "Mr. Chairman, given that you have announced your intention to cease purchasing US Treasuries in June of this year, what will be the result if no one steps in to take your place?"

Not sure why no one asked that question. It would have been my first!

And... are gold stocks still underperforming the gold price?

Radically so. It is a shocking disconnect! However, the long tail and the trend reversal in today's chart looks optimistic for gold mining shares in the short-term....

If we had a new high in gold and gold stocks climbed... that would be a BIG DEAL! Let's wait and watch for that one....

That would change everything.

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