Bill Fleckenstein is my favorite investor in gold and silver; he is on the board of directors for Pan American Silver Corporation (NASDAQ:PAAS). In his latest post on gold, Fleckenstein broke down some economics of gold mining to suggest that shares of gold miners may be ready to surge.
It appears analysts are finally increasing their expectations of future gold prices. For example, “Citicorp raised his long-term gold price assumption to $1,050 from $950 and over the next four years to an average of $1,437.50 from $1,156.” Citicorp also analyzed a scenario with a long-term gold price of $1,850. (Note that the current low assumptions on gold futures provides yet another example of the generally low enthusiasm for gold.) These assumptions are important because Fleckenstein estimates that it costs a company like Newmont Mining around $550 per ounce to extract gold from its mines:
“…in the case of Newmont Mining, its 100 million ounces would cost you $350 an ounce if you acquired the whole company. Adding the $550 per ounce that it costs to yank the gold out of the ground means that, at roughly $900 an ounce, the gold with the dirt still on it is a lot cheaper than coins or bars selling for around $1,700 an ounce.”
In other words, while holding real gold is still good for the long-term (including buying the dips), owning shares in gold miners could provide more upside potential in the near-term as expectations for future prices finally rise.
These prospects may change my trading strategy on gold as well. To-date, I have held onto a core position in GLD (SPDR Gold Trust) and traded around it with shares in gold miners, particularly Goldcorp (NYSE:GG). I sold my last tranche of GG at the end of the last rally. As I prepare to buy back into GG during the current dip, I will be considering holding it much longer than usual. The key will be whether GG can break above the current trading range for new all-time highs. Such a breakout could ignite a sustained rally in the shares of GG (and other miners). NEM broke out to fresh multi-decade highs in early November before succumbing to the latest correction.
Disclosure: I am long GLD.