Seeking Alpha

Robert Hallberg's  Instablog

Robert Hallberg
Send Message
View Robert Hallberg's Instablogs on:
  • Seasonality of Gold

    Anyone that has been following gold for a while know that the metal has a seasonal factor with strong price performance in the fall and winter and weaker performance in the spring and summer. Since the beginning of this decade long bull market, gold has made an annual high in November or December, except during 2006 and 2008. This year gold made a high in September and we are yet to see if gold will test the old highs or perhaps make new highs.

    The chart below shows the seasonal strength and weakness of gold. It is calculated based on the monthly average annualized increase in gold over the last 10 years.

    Similar seasonal trends can be found among the gold shares. This chart also shows the monthly average annualized increase in the gold bugs index (HUI) over the last decade.

    Although gold has been a decade long bull market, it has paid off to buy on the weakness in the spring and summer and hold throughout the fall and winter.

    Nevertheless, the price performance of gold has been a little different this year with a massive rally starting in august, which was followed by a correction towards the end of September. This may have created an opportunity for investors to add to their positions in anticipation of several historically strong months of gold ahead. Furthermore, the chart looks solid with gold in upward trending pattern.

    To learn more about investing in gold, gold stocks and gold and silver ETFs, and mutual funds check out Casey Research BIG GOLD publication.

    Read More…

    Nov 18 1:12 AM | Link | Comment!
  • Rules for Investing in Gold Mining Companies

    I have been investing in gold mining companies for a number of years and although this sector can offer spectacular returns it also has quite a number of challenges.

    First of all, gold mining is a very tough business. It is capital and energy intensive, it requires large upfront investments, and there are a vast number of environmental laws and regulations that companies must comply with.

    Furthermore, most companies in this industry are in a constant need for capital to fund new mining projects, and needless to say the biggest risk to investors is dilution.

    As result, gold mining stocks are subject very high volatility with huge price swings. This of course adds both risk and creates opportunities.

    Here is a list of guidelines that may prove to be helpful…

    Bet on the Jockey not the Resource

    The first question you want to ask is who is running the company and who are the majority stake holders? Some management teams are better than others, so make sure you look at their track record. For example, Rob McEwen and Pierre Lassonde are two persons that have solid track record of building up successful mining companies, and betting on talent like this certainly eliminates risk. This sort of information is available from a variety of sources, including company websites and other publication like King World News and Casey Research.

    Make sure that management have a significant stake in the company. Management needs to be financially aligned with shareholders. Rob McEwen for example has a 22% stake in US Gold, the company he runs, and he does not take a salary as the CEO. He has stated that he plans to make all his money in stock appreciation just like all other investors.

    Properties

    Consider that more than 90% of all the properties controlled by mining companies will never actually become mines. This is because finding a mineral deposit with the potential to host an economically viable resource is both time consuming and expensive. Building a new mine requires serious research, commitment and tens or even hundreds of millions of dollar in capital just to get started, so it’s essential that the company do its due diligence and get it right.

    Before you consider putting money into a new project make sure that the company has hard facts and drilling results to back up claims of mineralization in a prospective property. Ignore all claims made by company executives that are not derived from hard facts. A common stunt made by mining executives is telling the public that they have identified a resource with potential but lack hard data to back it up.

    Politics

    A large and growing number of gold deposits found today are located in backwater third world countries. This is why it is so important to understand the political situation in the country where the property is located. For example, are there rebel groups or kidnap gangs operating around your mine site? Is there a likely danger that the country will nationalize foreign assets during troublesome times? How easy or hard is it to get permitting and is there a lot of red tape? The process of getting permitting is usually slow and can take many years, especially in western nations. These are all good questions to ask company executives. Do your due diligence and remember that political risk is perhaps on for the biggest risks to mines in today’s society.

    Valuation

    Gold mining stocks have different characteristics from general equities and traditional measures such as P/E ratios don’t do well in assessing the true value of the company. Other factors such as company cost, production rates, and development trends are more important. The model below was developed by Bud Conrad at Casey Research and it analyzes gold mining stocks based on 8 different factors:

    ·         – Proven and Probable Reserves – Total amount the mine is expected to produce.

    ·         – Cash Cost per Ounce – The cost per ounce the company expects to pay for labor, equipment, etc to take the reserves out of the ground and to the market place.

    ·         – Mine Asset Value – The difference of the price of gold today and the production cost per ounce multiplied by total reserves.

    ·         – Debt – Total debt of the mine. Mines are very expensive and most borrow to start production.

    ·         – Hedge Liability – An obligation the mine has to deliver gold at a future price that is below the market price.

    ·         Mine Asset Value – The Mine Asset value minus Debt and minus Hedge Liability.

    ·        – Market Cap – The total amount of shares outstanding multiplied by its share     price.

    ·         –Valuation Ratio – The market cap divided by Net Asset Value.

    The purpose of Bud Conrad’s model is to compare the gold reserves in the ground against the stock price to see whether the price is low enough to be attractive. The table below compares the value of different gold mining companies. The far right column shows the valuation ratio. A ratio of 1.0 indicates that a company’s stock may be expensive compared to its assets and a value of closer to zero indicates a bargain.

    Gold Mining Companies

    Financing

    The company’s ability get financing is critical. It will define the scope of the operation and the success of the project. Questions to ask is where are they going to get the money from? Are they going to get a traditional loan from a bank, are they going to issue bonds, or perhaps issue new shares to pay for the new project. Also, is the amount of capital raised sufficient to carry out operations or will they require additional financing later on?

    Remember, one key reason for poor stock performance for many companies over the last couple of years has been dilution of shares. Many companies have successfully grown profits but because of constant dilution of shares the stock has been flat. 

    Conclusion

    We are in the midst of a secular bull market in gold and chances are good that it will end in a mania. During the last gold bull market of the 1970s and early 1980’s many companies literally went from a few pennies to hundreds of dollars. And chances are good that a few companies will delivery equally high returns this time around, perhaps 100%, 1,000% or maybe even 10,000%. But remember that many other companies don’t deserve your capital and some others aren’t even worth the paper the stock is printed on. So make sure you do your due diligence.

    To learn more about investing in gold mining companies I highly recommend subscribing to a news letter that is able to sort out the good companies from the bad and provide that data to help you with key decision making. I say this because investing in gold mining stocks, especially junior minors is not the same as investing in blue caps or technology, and the professionals in this particular industry typically have much better track record than the average investor.

    I personally prefer Casey Research’s publications. The international speculator is tailored for junior mining companies and they have “boots on the ground” to physically check out the properties, and putting them through an intensive examination before making a recommendation. In addition, BIG GOLD is another subscription dealing with mid to large-cap precious metals stocks, gold and silver ETFs, and mutual funds. 

    Read More…

    Nov 16 2:05 AM | Link | Comment!
  • Why use gold as money?

    Why use gold as money? If you look up the term “money” you will see it defined as a medium of exchange, and a store of value. Money is the lifeblood of an economy. It is used to facilitate trades without using bartering, which is the foundation of the division of labor and a cornerstone to a higher standard of living.

    Government fiat currency currently serves as money throughout the world, but it is far from ideal. At present, it works well as a medium of exchange but it is a poor store of value. A good money (a medium of exchange, and a store of value) has certain characteristics. Aristotle defined these characteristics 4th century BCE, and they are still valid today:

    ·         Durable: A good money is durable and should not fall apart in your pocket. It should be close to unbreakable. This is why we don’t use fruit as money.

    ·         Divisible: A good money needs to be convertible into smaller and larger pieces without losing its value, so it can fit a transaction of any size. This is why we don’t use a porcelain vase as money; once half of it is gone it is pretty much worthless.

    ·         Consistent: A good money always looks the same, each piece looks the same as the next and it's easy to recognize. This is why we don’t use an oil painting as money. Each painting is different even when made by the same artist.

    ·         Convenient: A good money contains a high concentration of value into a small package and it is highly portable. This is why water is not used as money, even though it is essential for human life. You would need a truck full of water just to buy groceries, and just imagine how much you’d need to buy a larger item like a house.

    ·         Intrinsically valuable: A good money should be something that many people want or can use. This is vital to money functioning as a medium of exchange. Even though, you may not want to carry a gold ring or bracelet, you know that someone somewhere wants it and will take it in exchange for something else of value. This is why we should not use paper for money.

    Gold, and to some lesser extent Silver uniquely well qualified as money. No other substances meet the five characteristics mention above better. Gold’s main use has always been money, not jewelry or technology, despite contrary beliefs. As more and more people start to wake up to the flaws of fiat money, gold will shine even clearer.

    The chart below compares a collection of fiat currencies against gold. Even though some have done better than others, they are all significantly down against gold over the last 10 years.


    One of the chief reasons for the loss of value among fiat currencies has been excessive money creation and ballooning debts worldwide. While paper money can be created endlessly, gold has a limited supply and thereby retains it rarity and value.

    The trend toward depreciating fiat currencies worldwide is intact, and one should protect him or herself against inflation and devaluation by owning gold and some silver. Gold has been used as money for over 5000 years and it has stood test of time as an inflation hedge and a safe haven.

    Read More…

    Nov 12 3:42 AM | Link | Comment!
Full index of posts »
Latest Followers

Latest Comments


Most Commented
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.