Bank of England vault
Gold Market Cheat Sheet (October 17, 2011)
For the week, spot gold closed at $1,680.73, up $42.88 per ounce, or 2.62 percent. Gold stocks, as measured by the NYSE Arca Golds BUGS Index, jumped 5.47 percent lower. The U.S. Trade-Weighted Dollar Index slumped 2.69 percent for the week.
Strengths
- Gold and the whole suite of precious metals had a meaningful rebound this week with the significant drop in the U.S. dollar. Not only was gold up strongly but silver rose 3.88 percent and copper, which is a byproduct of for a number of the gold miners, rose 4.65 percent.
- More significantly, the gold and silver mining stocks rose even more than the bullion prices as investors took advantage of the oversold conditions in equities.
- Considering some of the forced liquidations in the prior week or two, due to some hedge funds losing a third to half their value in September alone, the selling pressure has certainly waned as we saw a handful of companies’ share prices rise as much as 50 percent over the past five days.
Weaknesses
- The only drawback to the sharp rebound in some of the gold stock prices was the return of the investment bankers with a number of bought deal financings this week.
- While it is positive that some of the investment firms have the courage to risk their capital on an equity raise, perhaps signaling they don’t see any distressed clients on the sidelines; it is a bit worrisome that several companies were willing to issue equity with only a minor rebound in their share price.
- Perhaps their management was as shell shocked as some investors were with the precipitous decline in valuations and the hauntingly painful memory of 2008 still lingering.
Opportunities
- The opportunity before us is the potential for a significant rebound in gold and gold equities. For our gold-oriented funds we have now marked three quarters in a row of negative performance. This has only happened one other time in the last ten years and that was during the 2008 credit crises. In the ensuing two years after that era, there was only one quarter out of the following eight quarters which had a negative return.
- What is also significant over the two year window post the 2008 collapse was that gold stocks were one of the few assets to appreciate beyond the high marks which were established prior to the credit crisis.
- As we are all aware, the problems of 2008 have not gone away, however, much of the counterparty risks now reside within the governments that suggested lending standards should be relaxed so everybody could buy a house or borrow money in perpetuity. Perhaps you don’t want to own a company that sells a product or service to government, unless they sell inks and dyes, but precious metals and mining stocks were one of the strongest performers coming out of this period.
Threats
- Earnings season is upon us and gold mining companies are beginning to report production metrics for the quarter. For the ten or so companies that have reported so far, only one company actually exceeded guidance for the quarter.
- In addition, most gold mining companies continue the practice of reporting “cash cost” metrics for gold production which artificially makes the company look very profitable. For instance a company’s press release may show gold production costs at $450 but in actuality, the total cost of production is closer to range of $1,000 to $1,500 per ounce of production. It’s no wonder that resource rents and windfall profit taxes have skyrocketed over the last five years of this ten year run in gold.
- Zambia is only the latest country to suggest that it now wants to increase state ownership in mining companies operating within its borders to 35 percent.
