Gold Miners: Amazingly Cheap

Do you own bullion yet?

During the last market rout, the price of gold plunged from $900 an ounce to $690 an ounce. The talking heads, seeing this, announced that gold is no longer a safe haven or a storehouse of value.

They’re wrong.

The idea that gold has somehow lost its safe haven qualities due to a temporary drop in price is beyond idiotic. To claim this is to ignore the role gold has played for well over five millennia. What are the odds that this has suddenly changed?

No, this recent drop in gold has come almost entirely from downward pressure in the “paper” gold markets — the COMEX and Gold ETF (GLD). And this downward pressure has come from two trends:

• Institutional liquidations
• The dollar’s rally

Hedge funds, pension funds, and even mutual funds have been slammed with redemptions in the last year — mutual funds alone have experienced $967 billion in redemptions since the beginning of 2008.

In order to meet these redemptions, funds have resorted to liquidating portions of their portfolios. Gold — which the stock-centric crowd never really believed in anyway — was one of the first items to go. And since the “paper” gold market is relatively small — the total value of gold on the Commodity Exchange in New York (COMEX) is roughly $5 billion — it doesn’t take much capital to crush gold in the “paper” markets.

As for the dollar’s rally, the Feds’ interventions and hyperinflationary money printing will put an end to this sometime in the not so distant future. You can’t add $6 odd trillion in liabilities to the US balance sheet, start trading in unsecured commercial paper markets — as the Fed did with its TARP facility — and increase the monetary supply at an annualized rate of more than 300% — the pace of money printing maintained by the Feds during the last month — and NOT kick the dollar in the face.

No, the dollar rally will end sooner rather than later. When it does, the last obstacle standing between a raging Bull market in gold and gold mining shares will have been removed.

Speaking of miners…

While gold has been hammered, gold mining stocks, particularly juniors, have been truly creamed. The explanation here is much the same as for gold: liquidations. However, while the gold paper market may be roughly $5 billion, gold juniors as individual plays are even smaller. So it takes even less money to beat these stocks down.

Because of this, today, gold mining stocks are currently trading at levels you only see at the end of BEAR markets. Taken as a whole, the sector is at its second cheapest level relative to the price of gold since 1984.

It’s an absurd situation. Gold is undergoing a correction during a bull market… while gold miners — basically real estate companies sitting atop gold — are trading as if they just ended a bear market in gold. This won’t last forever. At some point both the institutional liquidations and the dollar’s rally will end. When they do, gold miners will explode upwards.

Comments

[stocks:]

Gold is a valuable investment. Although it went down a pretty low price. It will go up just a matter of time.

2008 Oct 27 10:55 AM

[Greg Weston:]

The second of 2 SA articles today pumping gold that ignore deflation.

For an overview see this article by a former gold bull:
globaleconomicanalysis...

Even better, look at the rise in the dollar and the fall in every single other commodity.

BTW India is the biggest buyer of consumer gold, and is now deeper in economic crises that the US.

2008 Oct 27 11:30 AM

[Hal.P.:]

I'm with you on the FED money flooding the market. That will lead to inflation in the not too distant future - I'm looking at 12 months - and then gold (real gold) will have some great value.

2008 Oct 27 11:34 AM

[Greg Weston:]

If "Fed money is flooding the market" then why is it so hard to get a mortgage or business loan?

The US real estate market and stock markets have lost a combined $8-$12 trillion. Leverage is collapsing. This means a vastly smaller money supply. Which means fewer dollars chasing the same amount of gold (and silver, oil, corn, etc) leading to falling prices.

I would not be surprised to see gold return to $400-450 range.

2008 Oct 27 11:49 AM

[CLH:]

Greg --You are right. Few investors have ever seen deflation and think only of inflation. Debt elimination causes destruction of money and deflation. Gold is dead for many years.

2008 Oct 27 01:05 PM

[Patience3000:]

How was Gold performing in the 1930? How gold miners?

Here are some links:

www.chartsrus.com/char...

seekingalpha.com/artic...

2008 Oct 27 01:10 PM

[GUS100CORRINA:]

Good article ... confirms my analysis ... gold miners are truly undervalued. In addition to information you have presented, I also looked at currency translation as well as some statistical measures of fear and greed. With regards to currency translation, the strong dollar while bearish for Gold can be bullish for miner costs for mines outside of USA. Nearest I can tell it is entirely possible that strong U.S. DOLLAR may have reduced miner costs in excess of 25%. I am expecting some commentary from miners confirming this reality. The other more interesting metric on value which is defined as the value that the daily closing price of an index or stock is away from it's 200 Day MA. For example, the XAU index that I used was plotted for time frame including 1999 thru present. Resulting Histogram (which I couldn't believe) contained 2245 samples. Using this simple greed and fear metric, it appears that XAU has 99% chance of advancing over coming days/weeks/months based on population of data points and behavior or index in relation to 200 Day MA.

One other item, my calculations also indicate that Gold and Silver mining stocks look to be priced at about 40% of proven and probable as well as Measured and Indicated reserves that they currently have in the ground.

To all ... take care ... God Bless

2008 Oct 27 01:28 PM

[beabaggage:]

Juniors will benefit most from strong dollar and low shipping/labor/oil/ste... costs, so while Gold may be down from 1000 to $740, 26%- yes painful but not a crash- the juniors got beaten down because their costs were rising dramatically. I bet they are getting refined Alberta oil now for $2-$2.20 a gal to run their equip. factor in lower other costs and the margins could improve in the next few quarters enough to offset lower gold prices.
Then all the funny money printed in the last few months by the world's central bankers will start chasing hard assets again in the NEXT BUBBLE. Bubbles are massive cash hoards chasing something. Real Estate, Commodities, now US Dollars. With hedgies driven out, earnings will drive junior and larger cos higher like they should in a normal world not driven by day traders and those searching for quick profits.
So there is a lot of value in good juniors with producing plays, little debt, lots of equipment paid for or in place in safe countries like US, CN, AUS.

Long NXG. have seen this stock go from 1 - $4.50 in 9 mos check out the 05-06 chart. this could happen again, it may take another quarter or two. Plus they could put hedges on for some production to secure cash flow. CN banks are flush and still lending.

2008 Oct 28 09:07 AM

[jt:]

Then please please PUHLEEEEEZE, CLH...short and put the crap out of it!!! You're one of the posters here I'd just LOVE to do well. I'm hoping you short it all the way down to $400...and then do it some more. Oh, and buy LOTS and LOTS of treasuries, too, ok? Few here deserve the kind of success I believe you'll have like you do.

2008 Oct 28 09:11 AM

[ritr54:]

I can't believe a major like Goldcorp, Newmont or Freeport won't bid for NXG, AZK, LMC or NG!!!

2008 Oct 28 01:16 PM