dwot

Gold vs. Gold Stocks: Commodity Outpacing the Sector

I wrote a piece on my blog titled "How I Discovered the Gold Bubble" in which I outlined many of the problems facing mature gold producers. Most of my analysis was from only looking at Goldcorp, which is compounded by the fact they were getting most of their profitability from copper and not gold, so that specific problem would not apply to a pure gold producer. But I think the rest of the problems facing Goldcorp are industry wide.

I just discovered Newmont has had all of its copper hedged at $1.54, which comes off later this year so although I still think mature gold producers are overvalued, Newmont should show better performance relative to peers in the second half of 2007. They have about 230 million pounds of copper production. To me that looks like about an extra 50c per share in pre-tax earnings for the second half of the year.

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Which To Buy -- Gold ETFs or Gold Mining Stocks? (ETFs: CEF, GLD, IAU; Stocks: ABX, FCX, NEM, NTO, RGLD)

I actually think gold stocks are in a gold bubble, and I can back that statement with fundamental analysis.

I did a comparative valuation between NTO and GG, and fundamentals are so grossly different, I find it amazing that the difference wouldn't be picked up by anyone who is making those kinds of recommendations. I'd send it to you, but I couldn't find an email link, but this is a summary of what is working against gold mines these days:

1. The leverage of earnings have grossly decined.
2. The price elasticity of gold bullion to gold stocks, ie, market cap is 3 to 20 times better for bullion than for gold stocks. (Kinross had the best price elasticity out of the gold stocks I calculated.)
3. The increasing cost of acquisitions, from $33/oz at the start of the bull to a max of $175/oz for Glamis.
4. Increasing rates of depletion of reserves.
5. Lower quality gold properties available to replace reserves.
6. Rapidly declining level of reserves to market cap.

Which To Buy -- Gold ETFs or Gold Mining Stocks? (ETFs: CEF, GLD, IAU; Stocks: ABX, FCX, NEM, NTO, RGLD)

Gold stocks no longer provide the leverage performance of the past, plain and simple. Leverage returns decline rapid the further you get into a bull run. Early, leverage returns were 10-fold, and it made gold stocks a great performer. Now at best you can get 1.2 kind of leverage.

How leverage played out early in the bull run on gold and how it can not repeat that performance is really poorly understood.

Furthermore, currently costs for gold stocks are increasing faster than gold the price of gold bullion, so I believe this will result in a negative leverage.