Three Reasons to Buy Gold Equities Today

Monday, May 13th, 2013

Three Reasons to Buy Gold Equities Today

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

May 10, 2013

A strong stomach and a tremendous amount of patience are required for gold stock investors these days, as miners have been exhibiting their typical volatility pattern.

That’s why I often say to anticipate before you participate, because gold stocks are historically twice as volatile as U.S. stocks. As of March 31, 2013, using 10-year data, the NYSE Arca Gold BUGS Index (HUI) had a rolling one-year standard deviation of nearly 35 percent. The S&P 500’s was just under 15 percent.

I believe the drivers for the yellow metal remain intact, so for investors who can tolerate the ups and downs, gold stocks are a compelling buy. Here are three reasons:

1. Gold Companies are Cheap.

According to research from RBC Capital Markets, Tier I and Tier II producers are inexpensive on historical measures. Based on a price-to-earnings basis, RBC finds that “shares are currently trading not far from the recent trough valuations observed during the 2008 global financial crisis.”

And on a price-to-cash-flow basis, gold stocks are trading at bargain basement prices. The chart below shows that average annual cash flow multiples for North American Tier I gold companies have fallen to lows we haven’t seen in years. Since January 2000, forward price-to-cash-flow multiples have climbed as high as 26 times. This year, we see multiples at the high end that are less than half of that.

On the low end, today’s price-to-cash-flow of 6.5 times hasn’t been seen since 2001.

click to enlarge

Tier I and Tier II companies “offer investors an attractive entry point from an absolute valuation perspective with respect to the broader market,” says RBC.

2. Gold companies are increasing their dividends.

With the Federal Reserve suppressing interest rates, investors have had to adapt and reallocate investments to generate more income.

That’s where gold companies come in. I have discussed how miners have become much more sensitive toward the needs of their investors as they compete directly with bullion-backed ETFs and bar and coin buying programs.

In response to shareholders’ desire to get paid while they wait for capital appreciation, gold companies have rolled out dividend programs and increased payouts. “The growth in dividend payout has been spectacular when looking at the industry as a whole,” says my friend Barry Cooper from CIBC World Markets.

His data shows that over the past 15 years, the world’s top 20 gold companies have increased their dividends at a compound annual growth rate of 16 percent. By comparison, gold only rose 12 percent annually.

click to enlarge

Not only are gold companies increasing their payouts, the yields offer a tremendous income value to investors compared to government bonds today. Whereas investors receive a 1.5 percent yield on a 10-year Treasury, the stocks in the Philadelphia Stock Exchange Gold and Silver Index (XAU) are paying a full percentage point more!

This is a significant change from the past: In April 2008, the Treasury yield was nearly 3 percent more than the dividend yield of the XAU.

In addition, the yields of gold stocks have been climbing over the past year while the 10-year Treasury remains low.

click to enlarge

3. Enhanced returns in a diversified portfolio.

We have long advocated a conservative weighting of 5 to 10 percent in gold and gold stocks because of the inherent volatility you are seeing today. But despite the extreme moves, there’s a way to use gold stocks to enhance your portfolio’s returns without adding risk.

Take a look at the efficient frontier chart below, which creates an optimal portfolio allocation between gold stocks and the S&P 500, ranging from a 100 percent allocation to U.S. stocks and no allocation to gold stocks, and gradually increasing the share of gold stocks while decreasing the allocation to U.S. equities.

The blue dot shows that from September 1971 through March 2013, the S&P 500 averaged a decent annual return of 10.34 percent.

What happens when you add in gold stocks? Assuming an investor rebalanced annually, our research found that a portfolio holding an 85 percent of the S&P 500 and 15 percent in gold stocks increased the return with no additional risk. This portfolio averaged 10.96 percent over that same period, or an additional 0.62 percent per year, over holding the S&P 500 alone. Yet the average annual volatility was the same.

click to enlarge

Although 0.62 percent doesn’t seem like much, it adds up over time. Assuming the same average annual returns since 1971 and annual rebalancing every year, a hypothetical $100 investment in an S&P 500 portfolio with a 15 percent allocation in gold stocks would be worth about $7,899. This is greater than the $6,246 for the portfolio solely invested in the S&P 500 while adding virtually zero risk.

Case Study: Alamos Gold (AGI)

Not all miners are worthy of your investment, and the task of picking quality gold company candidates isn’t simple. One company we currently like is Alamos Gold, which reported first-quarter 2013 results last week.

To the delight of many mining analysts, the company beat analysts’ expectations on both the top and bottom line. Alamos grew its production to 55,000 ounces of gold from 40,500 ounces in the same quarter last year.

In addition, AGI boasts an 8.76 percent free cash flow yield, allowing executives to build the business through paying off debt, making acquisitions or returning money to shareholders. In Alamos’ case, the company announced a stock repurchase of 10 percent of its float over the next 12 months.

While the company trades at a premium to most junior producers, it may be well worth the extra coin, as its low cost profile, cash generation and self-funding capabilities, as well as its discipline in returning capital to shareholders fit our growth at a reasonable price (GARP) model.

Copyright © U.S. Global Investors

Tags: Gold, Gold Equities
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Gold Market Radar (May 6, 2013)

Saturday, May 4th, 2013

Gold Market Radar (May 6, 2013)

For the week, spot gold closed at $1,470.75 up $8.66 per ounce, or 0.59 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.59 percent. The U.S. Trade-Weighted Dollar Index lost 0.46 percent for the week.

Strengths

click to enlarge

• For the week, spot gold closed at $1,470.75 up $8.66 per ounce, or 0.59 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 0.59 percent. The U.S. Trade-Weighted Dollar Index lost 0.46 percent for the week.
• INK Research reports insider buying on the TSX Venture exchange is nearing record highs, led by the mining sector. The company’s proprietary insider buying indicator hit 715 percent, meaning there are seven stocks with insider buying for each stock with insider selling. The recent surge bodes well for mining junior stocks as the insider buying indicator correctly foreshadowed the recovery in prices following the 2008 crash says David Kwan of Salman Partners. It appears physical gold buyers are not the only gold bulls in the market today.
• During a recent panel discussion David Franklin of Sprott and Frank Holmes discussed the recent sell off in gold and agreed that gold sentiment has bifurcated with financial buyers reducing their allocation to gold while physical investors have increased their purchases. As a result, Frank stated that as uneducated buyers get shaken out of the market, and educated buyers jump in gold, ownership is effectively transferred from weak hands to strong hands.

Weaknesses

• Evy Hambro, manager of BlackRock’s commodities funds was very critical of recent gold stocks performance at a private event in London this week. Hambro placed the blame on poor execution on the part of managers, and noted their poor job at delivering value to shareholders. These comments are not new, but they do serve to remind investors of the difficulty in picking the best stocks among an industry with rapid rising costs, recent weak pricing, and high execution risk.
• The reporting season started with some previous underperformers confirming their status. Newmont Mining disappointed with its high costs and lower grades which make its full year cost guidance now difficult to achieve. Goldcorp also battled lower grades as it announced lower by-product numbers at Penasquito. Kinross anticipated its reporting to announce its widely expected prefeasibility study of Tasiast. The project has only an 11 percent internal rate of return at $1,500 dollar gold. No sensitivities were given to see what could happen in a bad pricing scenario to a project that has already seen multi-billion dollar write-downs. And lastly, George Topping of Stifel Nicolaus shared the news that Barrick/Goldcorp’s gold exports from Pueblo Viejo in Dominican Republic apparently have been halted againas the companies are reportedly required to pay an unsubstantiated and unlikely $992 million in fines and penalties.
• New Gold Inc. reported weak earnings this week. The company missed earnings and production guidance based on lower than expected production from its New Afton mine as low grade open pit waste material had to be removed to reach the high grade ore. The company also reported lower production at CSP and Mesquite based on lower grades at the leach pads.

Opportunities

• A symbolic change in sentiment happened this week as Allied Nevada was able to complete a bought deal this week led by Dundee Securities. Dundee Securities President Ned Goodman is a widely respected in the mining industry and his company stepped up and raised equity for a gold company amid negative investor sentiment. The deal, valued at $150 million is by no means small, and demonstrates capital markets are healthier than initially thought; at least in the presence of strong leadership with a proven record of success.
• The Arizona State Senate approved legislation to make gold and silver coins legal tender in the state. The bill was eventually vetoed by the Governor who cited the lack of coordination with Federal agencies tasked with overseeing these transactions for her inability to pass the legislation. Despite this fact, it has become evident there is a lack of confidence in the monetary system. The push to establish gold as currency in the United States has become increasingly popular, with more than ten states currently drafting similar legislation.
• The addition of two words to the latest Federal Open Market Committee communication issued on Wednesday has given us more reasons to believe the Fed is not likely to taper purchases as early as some economists anticipate. The sentence now reads that not only is the Fed ready to reduce asset purchases when it deems it necessary, it is now also ready to increase those purchases to maintain appropriate policy accommodation. The correlation between the size of the Fed’s balance sheet and the price of gold continues to be strong despite a recent divergence. Further easing, even the sole possibility of it, should bode well for gold prices.

Threats

• Dundee Capital Markets studied the three-year annualized percent increase in per tonne costs for 99 mines around the world. The results are staggering; their estimates talk of a median annualized rate of cost inflation of 11 percent over the last three years. It is evident mining cost inflation is widespread, but when comparing these costs with a 2 percent annual CPI, one can conclude costs are out of control. With gold prices showing weakness in recent months, margin compression is a genuine threat for those companies that cannot control their cost inflation.
• Dundee Capital Markets also looked at the recent developments that have changed the fiscal risk panorama for both seniors and juniors in the space. The regulatory instability of developing countries is not at all surprising, with at least eight documented cases of added fiscal pressure to miners. Countries such as Ghana, Romania, Senegal, and Armenia among others increased or sought to increase royalty payments from miners in the last 12 months. As if these risks were not enough, traditional mining friendly jurisdictions in developed countries have also turned their back on miners recently. Australia’s super profits tax, Nevada’s proposed changes to royalty rates, and Quebec’s potential windfall tax, and Mexico’s recently discussed new royalty system are only a few of the frontal attacks miners have been subject to in recent months.
• Financial media outlets have convinced investors that the gold sell off in mid April is broad based and that gold has lost its fundamental value. An interesting report was published this week in which it became evident that only a few players have parted with their physical gold in the last three months. What is most interesting is the fact that JP Morgan accounts for 99.3 percent of the gold delivered in the Comex market since February 1. This is the same bank that was investigated in connection with a possible silver price manipulation after whistleblowers alerted the Commodities Futures Trading Commission in November 2009. Back then it was speculated that the bank was acting as an agent of the Federal Reserve, holding down the price of silver, to buoy confidence in the U.S. dollar.

Tags: Gold, Gold Equities, Gold Market
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Don Vialoux: 9 Rewarding Seasonal Equity Trades

Friday, August 10th, 2012

by Don Vialoux, Tech Talk

(Based on reports published by www.globeandmail.com. Reports were forwarded to Globe and Mail each weekend and published early in the following week).

June 11:Accumulate the Leisure & Entertainment sector

ETF:PEJ at$20.73. Current price: $21.57

Comment: Continue to hold. Technical profile remains positive. Units continue to trade above their 20, 50 and 200 day moving averages. Short term momentum indicators continue to trend higher.

June 22: Accumulate the Fertilizer sector

ETF: SOIL at $12.20. Current price: $13.94

Comment: Continue to hold. Technical profile remains positive. Units continue to trade above their 20, 50 and 200 day moving averages. Units hit a new high yesterday. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive.

July 2: Accumulate the Software sector

ETF: IGV at $62.18. Current price: $62.32

Comment: Continue to hold. Technical profile remains positive. Units remain above their 20, 50 and 200 day moving averages. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index turned positive at the beginning of July.

July 6^: Accumulate gold bullion

Gold price: $1,578.90. Current price: $1620.20

Comment: Continue to hold. Technical profile continues to improve. Gold recently broke above a triangle pattern and moved above their 20 and 50 day moving averages. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index is neutral.

July 13: Accumulate Canadian gold equities

ETF: XGD at $18.01. Current price: $18.45

Comment: Continue to hold. Technical profile continues to improve. The TSX Gold Index recently moved above its 20 day moving average. Short term momentum indicators are trending higher. Strength relative to the TSX Composite Index has been positive since mid-July.

July 20: Accumulate the Canadian energy sector

ETF: XEG at $15.12. Current price: $16.16

Comment: Continue to hold. Technical profile continues to improve. The TSX Energy Index recently broke above a reverse head and shoulders pattern. The Energy Index remains above its 20 and 50 day moving averages and just moved above its 200 day moving average. Short term momentum indicators are trending higher. Strength relative to the TSX Composite has been positive since the last week in June.

July 27: Sell the U.S. Transportation sector

Dow Jones Transportation Average at 5,126.65. Current price:5,048.23

ETF:IYT at $91.56. Current price: $90.17

Comment: Continue to avoid (hold short). The Dow Jones Transportation Average fell below its 20, 50 and 200 day moving averages during the past few days. Strength relative to the S&P 500 Index remains negative.

August 6: Sell the Airline sector

ETF: FAA at $28.66. Current price: $28.43

Comment: Continue to avoid (hold short). A break below $27.94 completes a double top pattern. Units trade below their 20 and 50 day moving average and moved below its 200 day moving average during the past few days. Strength relative to the S&P 500 Index has been negative since early July.

Eric Wheatley’s Column

Preamble: Every time I mention the fact that I’ve written options and investment guides or write something particularly controversial (not liking hockey is a salient example) I get a bunch of emails, which means SOMEONE is reading these ramblings. When I DO get messages, folks seem to think they’re bothering me so, to be clear: I work from home, have the business channel on all day, read financial stuff, work on spreadsheets for the Boss and myself and otherwise crave human interaction. We’re a long-term investing company, so contrary to your average broker, we don’t really need to spend all our time calling clients asking them to sell their BMO to buy BNS. If anyone is curious about options or investing and has questions, I promise to respond with joyful alacrity.

…yeah, there was no way this preamble was going to be anything less than full-on pathetic.

*****************

Good morning,

We’re continuing with our options basics lessons which started a few weeks ago. We’ve already looked at the factors which affect options prices and how buying in-the-money calls is an efficient, low-cost alternative to buying shares outright. This week, let’s look at what really happens when options expire.

(Please note that I’ll be skipping over the few weekly options that are listed on the CBOE and sticking with regular, plain-vanilla options in this commentary).

All normal stock options expire on the Saturday following the third Friday of the expiry month (or on the Friday if it falls on a holiday on which the markets are closed). To illustrate, this month, the third Friday is the 17^th, so all trading in August options will cease at the close of the markets on that day and contract holders will be able to order their brokerages to strike the options or to let them expire until the following day at noon.

The preceding statement is one of the frequent justifications for not using options. “They’re too complicated” or “they require me to always look at them! I don’t have the time”. False. Even the most indolent loafer can use options because there is a safety switch built into the system. If you hold an option at expiry and you completely forget, the clearing corporation will automatically strike your option if it’s in-the-money (in Canada, it has to be in-the-money by at least five cents). This means that, for a call option, you will receive 100 shares per contract in your account three business days later. For put options, you have to deliver 100 shares (your brokerage will handle things if the shares aren’t in your account, but you should check with it to determine its procedures).

Fine and dandy. You can lounge by the pool in full-on lethargy mode knowing that the system works. Except…

So, you own a call option. It has a strike price of $50. You’re swimming with your dog in the pool having a grand time and your spouse enjoys making his/her horribly addictive margaritas for you and you’ve completely ignored the call’s expiration. At the close, the stock is at $50.25. “Great!” you tell yourself. “The call’ll be struck with or without my intervention and I’ll make a quarter. I’ll have another please honey. Go easy on salting the rim though. Please. Love you”.

…slight problem, though: you’ll be getting the shares in three business days. When you finally get them, who knows where the stock will be at? The smart thing (which is done by professional options traders in this situation) would be to short-sell the shares which will be delivered to you. This locks in the current price, which means that when you eventually get your shares a few days hence, you’ll be able to deliver the shares, close the short sale and pocket the amount the shares were in-the-money when you shorted them. Of course, all this adds up in terms of transaction costs. The easy way out? Before diving into the pool, sell your options prior to expiry.

Now, what happens if your call expires out-of-the-money, but news comes out at 4:05 p.m. on expiry Friday? Really, really good news. News which will almost certainly lead to a big open the following Monday. As mentioned before, the options’ official expiration is at noon on the SATURDAY following the third Friday. This means that you can call up your brokerage and put in an order to have them strike your call, which you can do even if they’re out-of-the-money. You’ll get the shares in three business days and be able to sell them at a nice profit.

The point to remember is that whether or not your option is in-the-money or out-of-the-money by a small amount at expiration is of little relevance. Unless you lock-in the current price, you can’t be assured of making money. This also means that there are NEVER any straight lines in options trading, even on those hockey stick graphs that bug me so much.

In this week’s French-language blog: explaining lending rates with references to agricultural tractors and a colourful red-eyed cousin.

Cheers!

P.S. You’ll notice that, as of this week, I’ve added a Twitter address to my signature line (@jchood_eric). Yes, I’ve joined the silly-update revolution. It’ll be bilingual and, for now, I’m just having fun with the medium, but if you can tolerate a bit of French in your feed, help me spread the gospel of proper investing techniques! (You’ll be assured that my tendency to go on forever in my writing will be constrained).

Éric Wheatley, MBA, CIM

Associate Portfolio Manager, J.C. Hood Investment Counsel Inc.

eric@jchood.com

514.604.2829; 1.855.348.2829

Twitter: @jchood_eric

Blogue en français : gbsfinancier.blogspot.ca

*****************

Little known fact about John Charles Hood #38

John Charles Hood goes on forever too. In a completely different context, but still.

(Clarification: I was referring to his passion for big-game hunting and the subsequent verbosity if you ask him about it).

*****

Special Free Services available through www.equityclock.com

Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.

To login, simply go to http://www.equityclock.com/charts/

Following is an example:

Agnico-Eagle Mines Ltd. (TSE:AEM) Seasonal Chart

FP Trading Desk Headline

FP Trading Desk headline reads, “Small cap golds on a run”. Following is a link to the report:

http://business.financialpost.com/2012/08/09/small-cap-golds-on-a-run/

Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.

Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc

Horizons Seasonal Rotation ETF HAC August 9^th 2012

Copyright © Don Vialoux, Tech Talk

Tags: agricultural, Bullion Gold, Canadian, Canadian Energy, Canadian Market, Don Vialoux, energy sector, ETF, ETFs, fertilizer, Globe And Mail, Gold Bullion, Gold Equities, Gold Index, Gold Price, Momentum Indicators, Moving Averages, oil, Pej, Price 1, Software Sector, Technical Profile, Triangle Pattern, Tsx Composite Index, Xeg, Xgd
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Gold Equities – Insider Buying Has Recently Soared – Time to Buy? (May 28, 2012)

Sunday, May 27th, 2012

Gold Market Radar (May 28, 2012)

For the week, spot gold closed at $1,573.03 down $19.96 per ounce, or 1.3 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, surged 7.88 percent. The U.S. Trade-Weighted Dollar Index gained 1.37 percent for the week.

Strengths

• Gold stocks strongly outperformed gold bullion this week.  As we have highlighted in the past there has been a significant disconnect between the price of gold and equity share prices.  The latest Canaccord Genuity Junior Mining Weekly highlights that one year ago, bullion was making new highs week-over-week with the price of gold rising up to $1,508 per ounce.  Based on Canaccord’s in-situ gold database, the market was valuing gold held by non-producers at about $129 per ounce.  One year later, while the price of gold is trading higher at $1,590 (5.4 percent higher than one year ago); the average in-situ value per ounce has dropped to $62 (52 percent lower than one year ago).  The junior miners have been put in the penalty box as capital markets have temporarily shut off the financing lifeline to these companies.
• With the S&P 500 now giving up more than half its gains for the year, much of the surge in gold stock buying over the past week came from generalist funds that may be diversifying in an uncertain market.  Another factor driving this buying may have been insider buying at the gold mining companies, which has recently soared according to the Market Ink Report.  The Market Ink Report notes that the stars may indeed be aligning for gold stocks as the eurozone faces the prospect of a full-blown banking crisis potentially taking hold over the next few weeks.  That would force the European Central Bank to provide further monetary easing.
• Despite gold being down this week it did get a lift in value as the International Monetary Fund (IMF) reported that central bank buying in gold was still proceeding at a brisk pace in April.  Turkey raised its reserves by 29.7 tons and Ukraine, Mexico and Kazakhstan also increased their holdings.  The Philippines, whose purchases actually date back to March but were slow in being reported to the IMF, reported gold purchases amounting to 32 tons of bullion–the biggest volume since Mexico bought around 78 tons a little over a year ago.

Weaknesses

• Feedback from the recent Bank of America Merrill Lynch 29th Global Metals, Mining and Steel conference in Miami showed there was very little interest in attending a gold company presentation, which could in itself, be interpreted as a buy signal.  Michael Jalonen, of BofA/ML noted he came to the conference with high hopes for news flow on capex reduction and a focus on capital returns but ultimately left feeling a little disappointed.
• Before a mining company has even applied for a permit for the Pebble Project Assessment in Alaska, the EPA stepped in and released its own report.  The EPA issued a heavy three-volume report on the possible impact of mining projects on the Bristol Bay watershed system but the agency insisted, “the draft study in no way prejudges future consideration of proposed mining activities.”  The U.S. Corps of Engineers is the primary permitting authority for dredging and filing permits for mining projects.  However, Senate Energy and Resources Committee Member Lisa Murkowski, R-Alaska, and others noted the EPA is determined to wrestle the mining permitting authority for itself, using the power it believes was granted by the Clean Water Act.
• Indian retail gold demand has been poor as the rupee has fallen significantly in value due to inflation and this has made gold more expensive in local currency terms.

Opportunities

• Ray Dalio was interviewed by Barron’s recently.  Dalio is one of the most successful hedge fund managers in the world, overseeing $120 billion in assets.  Dalio was asked if he is still a fan of gold.  Dalio noted it could be a bumpy ride temporarily because Europeans will have to sell gold in order to raise funds because they are squeezed but recommended that most people should have in the vicinity of 10 percent of their assets in gold, not only because he thinks it will be a good investment longer term, but because he thinks it is a very effective diversifier against the other 90 percent.  He also explained that he is viewing gold as an alternative currency.  “The big issue is debtor-developed countries, the U.S., Europe and Japan, all have a lot of debt and will have to print money or they will have credit problems.  I don’t want to have all of my money in those currencies.”
• Technical studies by Institutional Advisors show that the Philadelphia Stock Exchange Gold and Silver Index (XAU)/Gold Ratio has hit an extreme reading of less than 25 and such lows have only been seen around the important lows of September-October 2008, October-November 1948, the double bottom of March and October 1942 and June 1924.  Their work indicates these types of readings have historically marked turning points in the relative performance of gold versus the gold stocks and the current readings support stronger gold stock prices.
• Chris Wood, in his latest Fear and Greed report, said that gold has been acting like a risky asset lately, and it is only a matter of time before it resumes its safe haven status.  In the near term, so long as there are investors who own gold on leverage via ETFs or futures, there is always the risk of gold correcting further in a classic deleveraging trade.  But in the long run, gold is the only real hedge against both deflation and hyperinflation.  The ongoing experiment in unorthodox monetary policy from Western central banks will not end well.  While rising energy costs have hurt gold companies’ profit markets, CLSA says that with U.S. crude oil inventories rising, rising gold and falling oil prices are “a perfect ‘combo’ for gold-mining shares.”

Threats

• Don Coxe noted there is essentially a backroom political ban on investing in companies deemed impure by environmental NGOs and this is unfairly depressing the prices of some of the leading gold mining stocks, and hurting pension funds.  Coxe says pension funds are succumbing to political pressure, resulting in “more and more corporate pension funds…being impaled on their own funding swords due to inadequate investment returns.”  Coxe suggests that commodity stocks are “victims of a new form of persecution from two groups–those with contempt for capitalism, along with those who resent what mining and oil and gas companies do for a living.”
• To stop the development of several new mines that are being contemplated in Minnesota, a couple of NGOs recently went on the offensive to highlight that sulfide mining presents many more risks to their environment than traditional iron ore mining that has taken place in their state and the citizens need a broad conversation about this issue.
• The Canadian mining industry is seeing a couple of headline risks this week with the Teamsters strike, which shut down Canadian Pacific Railway freight lines early Wednesday with no end in sight.  This leaves mining and other resource companies in Canada faced with supply and fuel disruptions.  Also, forest fires in Canada have surfaced as a problem as some power lines to the mines have been damaged while other areas are shutting in to make sure air quality underground is free of smoke.

Tags: Banking Crisis, Brisk Pace, Dollar Index, energy, Equity Share, ETF, ETFs, Eurozone, Gold Bullion, Gold Database, Gold Equities, Gold Market, Gold Miners, Gold Mining Companies, Gold Stock, gold stocks, India, International Monetary Fund, International Monetary Fund Imf, Market Radar, New Highs, Nyse Arca, Penalty Box, Price Of Gold, Spot Gold
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Gold Market Radar (May 7, 2012)

Monday, May 7th, 2012

Gold Market Radar (May 7, 2012)

For the week, spot gold closed at $1,642.30 down $20.45 per ounce, or 1.23 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 5.79 percent. The U.S. Trade-Weighted Dollar Index gained 1.0 percent for the week.

Strengths

• While the industry remains under uncertain long-term pressures, the prior week was a positive light with the takeover of Trelawney Mining by IAMGOLD.  In a matter of days, many of the downtrodden gold equities bounced off their recent lows, as much as 25 percent.
• Rubicon Minerals pulled a deeply experienced mine operator away from Goldcorp’s upper echelons to take its top position and help the company grow from a junior explorer to junior gold miner.  Rubicon said that Goldcorp’s director of underground mining, Michael Lalonde, was coming on board to take over as president and CEO. He replaced David Adamson who has moved Rubicon from discovery through development, most recently raising some C$200 million to build Rubicon’s flagship Phoenix gold project.
• In other stock specific news,  PMI Gold Corp pulled some positive results from the first 13 holes of an initial drill program on the high-priority Fromenda prospect which is located 15 kilometers south of Obotan within the prospective Asankrangwa gold belt.  Clarus Securities believes these results, along with the recent discovery at Kaniago, firms up PMI’s growth thesis as the company advances its global resources towards 10 million ounces over the next 12-18 months.
• There is also a 15 percent depreciation in the value of the rupee against the dollar since September 2011, which has meant that the price of gold in India is back to the level last seen on December 8, 2011. Analysts are of the opinion that gold prices could well rise over 15 percent over the next 12 months given the uncertain economic environment.

Weaknesses

• Goldcorp announced that the Chilean Supreme Court has suspended the approval of the environmental permit for the El Morro project.  The main grounds for the court ruling are that the El Morrow joint venture company has not adequately consulted nor compensated the indigenous people.  El Morrow is a joint venture between Goldcorp and New Gold, whereby New Gold owns 30 percent of the project.
• Dundee Precious Metals Inc. announced that following completion of the Namibian government’s report on the environmental, health and safety audit, the government issued a letter to the company relating to the operation of its Tsumeb smelter and has instructed the company to reduce feed to the smelter by approximately half until the projects designed to capture fugitive emissions have been completed.  These improvements are currently underway, and will be completed in the second half of the year.
• AngloGold Ashanti reported its Mongbwalu gold mine in Democratic Republic of Congo faced the obstacle of tens of thousands of ex-fighters already mining the area who do not want to leave.  AngloGold plans to start output there late next year but as many as 200,000 artisanal miners, mostly ex-combatants from the conflict, have set up operations in the 6,000 square kilometer concession.

Opportunities

• In a research report George Topping at Stifel Nicolaus wrote “Stop ‘Growth At Any Price’ (GAAP) Building”.  Topping notes that rampant mining inflation has benefited those involved in mine building to the detriment of shareholders.  Mines that used to cost $2 billion only a few years ago now cost $5 billion.  Topping pointed out that if mining companies deferred lower internal rate of return (IRR) deposits this would allow management to better focus on cost control, send a message to consultants/contractors that fees have gone too far, and free up labor for the remaining projects. Projects should pass stress test levels of using a $1,200 per ounce long-term gold price and deliver a minimum 10 percent IRR. Shareholders are likely to be supportive if the capex savings are paid out as dividends which could be raised to levels that approach 5 percent. Topping points out that a change of strategy by the gold mining companies is required to reverse the flow of funds out of the gold sector.
• Relatively low capex, below $2 billion, deposits with competitive lower third quartile cash costs should be favored as being lower risk investments.  Additionally, building a new mine is fraught with difficult and typically a source of seemingly endless bad news flow during construction and build up. At current gold prices, Hammond Reef does not appear to be worth the risk. The current dynamic in the sector of escalating cash costs and capex creep have made the high grade/high margin deposits more accretive and with less downside exposure on the gold price, and these are the types of companies our gold funds focus on for delivering the best value creation over time.
• Marc Faber recently noted in an interview that people say the price of gold is in a bubble stage, and is up substantially from the lows in 1999. However, as he remarks about conferences and speaking engagements, “I usually ask the audience, ‘How many of you own gold?’  Normally, hardly anyone owns it.  I’ve been to conferences with thousands of people attending, and nobody owned any physical gold.”  A recent headline earlier in the week noted that more people own Apple stock than own physical gold.

Threats

• Gold Resource recently obtained an independent 43-101 report and reported 1.5 million ounces in 4.5 million tons, versus the company’s prior internal estimate of 1.7 million ounces in 3 million tons.  However the new study reports that the company holds 300,000 ounces in actual gold, while the other 79 percent is gold equivalent.
• It is disturbing that all the co-products the company expects to mine are swapped into gold at $1,000 per ounce, which may appear conservative at first glance but is actually very misleading.  Swapping gold at $1,000 per ounce creates the other 1,200,000 of gold equivalent ounces they say they have.
• However if you use spot gold prices that gold equivalent number drops to just 700,000 ounces of gold equivalent and you really only have about 1 million gold plus gold equivalent ounces; considerably less that the 1.5 million cited.  The half million ounces that disappear are more properly characterized at “paper ounces” because they are only exist in paper form versus physical gold.

Tags: Chilean Supreme Court, David Adamson, Gold Belt, Gold Corp, Gold Equities, Gold Market, Gold Miner, Gold Miners, Gold Prices, Gold Project, gold stocks, Goldcorp, Junior Gold, Market Radar, Nyse Arca, Phoenix Gold, Price Of Gold, Rubicon Minerals, Spot Gold, Upper Echelons
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Where’s the Beef for Gold Equities?

Sunday, April 15th, 2012

Where’s the Beef for Gold Equities?

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Gold bulls have plenty of room to graze in the stockyard these days as the investing herd migrated to other assets during the market’s steep climb in 2012. For the fourth time in the past year, gold bears outnumbered the bulls in Bloomberg’s weekly Gold Bull/Bear Sentiment Survey. In fact, the bears had the bulls outnumbered by almost 2-to-1.

Today’s growing sloth of gold bears is a “buy” signal for contrarian investors like us at U.S. Global. Research from the gold team at Canaccord Genuity found that gold rallied about 10 percent on average during the month following each of these sentiment “cross-overs.” This historical increase means that gold could potentially rally to the “high $1,700’s per ounce,” which Canaccord believes “would breathe some new life into the gold equities.”

After a year of neglect from investors who favored bullion, gold equities need resuscitation. Going back to April of last year, gold stocks have been undervalued compared to bullion. I discussed this disconnect back in June 2011 (Will Gold Equity Investors Strike Gold?) and again in August (Valuation Gap Makes Gold Miners Attractive, but All Miners Aren’t Created Equal).

This trend has been accelerating recently: At the end of March, the spread between the NYSE Arca Gold Miners Index and gold bullion was at the same extreme level it was during the 2008 credit crisis despite a much rosier global economic outlook. Going back the full decade of gold’s bull run, this is quite a rare event.

It hasn’t been a complete drought for gold equity investors though, as there have been occasional spurts of relief over the past year. From the beginning of 2011 through the middle of the year, the S&P/TSX Global Gold Index declined by 14 percent. The index then quickly reversed course upward during the market’s volatile period last fall. Now, the index has been declining for four months now, dropping 28 percent, while gold bullion has only fallen 9 percent over that same time period, says Canaccord.

Believe it or not, the four-month selloff is a bullish sign for gold stocks. If you expand your time horizon, you’ll see each dip has been a turning point for gold stocks. Canaccord says that, “sector weakness (less than one year) in the gold equities over the last six years has typically ended with “V” shaped corrections to the upside.” Gold investors must be quick to “buy on the dips” since these sharp V-shaped corrections have been frequent.

The Stampede to Buy Undervalued Gold Miners

If you plan on shopping for bargains in the gold miner department, you’re going to have to fight a crowd. Numerous global investors have been pounding the table for gold stocks, including Dr. Marc Faber who said “gold shares have become extremely oversold and could rebound in the next few days” in his April market commentary and Global Portfolio Strategist Don Coxe, who reiterated that gold equities are undervalued compared to the precious metal on his weekly conference call today.
Another big buyer has been the miners themselves. Mergers and acquisitions in the mining sector have been at an all-time high over the past two years. Large gold miners such as Barrick, Goldcorp and Kinross have been taking advantage of these cheap valuations by snatching up small miners with proven deposits.

And they’ve been willing to pay a premium too. According to Desjardins Capital Markets, over 2010 and 2011, a total of 26 mergers and acquisitions have taken place to the tune of more than $30 billion. In this time period, the buyout or purchasing premium has averaged more than 40 percent.

Desjardins says the M&A trend in the gold sector should continue, given “growing cash hoards and a lack of new discoveries” of the precious metal. As one example of this ongoing worldwide trend, Bloomberg News reported today that, “Chinese gold producers are vying for domestic and overseas mining resources,” with two companies competing for two different gold mining companies located in the eastern province of Shandong.

Big miners have historically purchased the known assets of their rivals as a way to increase reserves rather than deal with the heartache and headache of drilling core samples and filling out permit applications. Large-scale gold production is a complex and costly process involving digging, transporting, crushing and chemically treating massive quantities of rock to get at small amounts of gold. In fact, a commercially viable deposit could contain just a tiny fraction of an ounce of gold for every ton of mined rock. If you’re curious about this phenomenon and want to learn more, check out my book The Goldwatcher: Demystifying Gold Investing where I go into greater detail.

With the signals there for a bounce and stocks undervalued, what’s stopping investors from buying gold equities? One reason could be margin pressure. Rising energy costs, reduced supply and currency swings can quickly erase a gold company’s margin. It takes a great deal of diesel fuel to run the shovels and dump trucks that haul ore to the mill for processing and rising energy costs can affect the profitability of a mine substantially. These variables are the project’s cash costs, or how much capital must be spent to pull an ounce of gold out of the ground.

From the first quarter of 2008 through the third quarter of 2011, the global average cash cost has been rising for miners at a rate of about 8 percent year-over-year. Desjardins says costs will “likely remain under pressure, especially on the energy and labor fronts.”

However, as Desjardins points out, at the level that gold is at now, “most producers will be generating significant cash flow and earnings,” using this cash to fund takeovers, build out development pipelines and pay higher dividends.
Another barrier for investors could be perceived volatility. On Bloomberg Radio, I explained to host Kathleen Hays how gold’s 12-month rolling volatility is very different from the way it’s perceived. While the normal volatility for the S&P 500 Index is up or down 19 percent over a 12-month period, it’s only 13 percent for gold bullion.

My friend and CIBC analyst, Barry Cooper heard my Bloomberg interview and emailed me the chart below showing how the TSX Global Gold Index ETF/Gold Price Ratio has historically been negatively correlated with gold’s volatility. Two times over the past four years, when gold price volatility was falling, it was generally associated with rising valuations of the TSX Global Gold Index ETF. Today it’s a different story: Gold’s volatility and value are both going down. According to Barry, “either we are in a totally new regime for gold shares or something has to give.”

The cold shoulder from investors has also given way to a promising trend in the gold space—growing dividend payouts. We believe this is one can’t-miss trend. We’ve been paying close attention to this as it has developed over the past few years, because through monthly or quarterly dividends, investors can receive income while they wait for share prices to appreciate. To capture the income potential, we’ve adjusted the portfolios of USERX and UNWPX to hold some of these dividend-payers. Many of these holdings pay a monthly dividend that is higher than the two-year government note, have rich balance sheets and receive royalties from all over the world on their gold mines.

We encourage investors to think contrarian: Eat up all you can while the pasture is wide open, because as the chart above shows, when gold equities reverse, it happens quickly.

Tags: Bullion Gold, Chief Investment Officer, Contrarian Investors, Credit Crisis, Equity Investors, Extreme Level, Frank Holmes, Global Economic Outlook, Global Gold, Gold Bullion, Gold Bulls, Gold Equities, Gold Equity, Gold Index, Gold Miners, gold stocks, Gold Team, Nyse Arca, Strike Gold, U S Global Investors, Volatile Period
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Gold Market Radar (February 6, 2012)

Sunday, February 5th, 2012

Gold Market Radar (February 6, 2012)

For the week, spot gold closed at $1,726.25 down $12.82 per ounce, or 0.74 percent.  Gold stocks, as measured by the NYSE Arca Gold BUGS Index, fell 1.2 percent. The U.S. Trade-Weighted Dollar Index was essentially flat with a gain of just 0.1 percent for the week.

Strengths

• The Year of the Dragon Lunar New Year holiday in China set a new record for gold buying.  Sales for the two top jewelry sellers reached about 600 million yuan ($95 million), a nearly 50 percent jump over the prior year.  With many Chinese losing money in the stock and property markets last year, gold is emerging as one of the preferred investment choices.
• The China Gold Association reported that the country’s gold production for 2011 rose 5.9 percent in 2011 to 361 tonnes.  Five years ago, China became the world’s largest producer of gold. Most analysts believe that all of this domestic production is bought by the government to add to its reserve base, which is underweight gold relative to the size of its economy and its exposure to the dollar.
• In addition, estimates for Chinese gold imports in 2011 are roughly 490 tonnes. The public has a large appetite for gold accumulation as a means to build wealth.

Weaknesses

• A recent study by South Africa’s ruling African Nation Congress (ANC) has rejected calls for mine nationalization, but has come out in support of higher taxes and royalties.
• The policy for nationalization lost political momentum after the prime instigator, Julius Malema of the ANC Youth League, was found guilty of sowing discord among the party.
• Talk of nationalization has kept investors wary of South Africa, with higher taxes and royalties still issues.

Opportunities

• Don Coxe, in his latest edition of Basis Points, urges gold investors to invest in gold equities at the expense of bullion ETFs as the Fed continues its policy of nonstop money at zero rates.  Likewise, David Rosenberg, of Gluskin Sheff, notes the Fed policy of currency debasement means that, in his opinion, exposure to gold and gold mining stocks in a portfolio is an absolute necessity.
• In a recent issue of Market Musings & Data Deciphering, David Rosenberg highlighted the Fed policy of keeping interest rates low with the potential for more quantitative easing to come, coupled with the current back-door QE program in the eurozone as being very constructive for gold.
• Rosenberg suggested investors would be more highly rewarded if they bought gold mining stocks versus gold bullion.  He also noted that, historically, gold mining equities tend to dramatically outperform bullion in the later stage of a gold bull market.

Threats

• The Fed policy of extending low interest rates is making life much more difficult for insurance companies and pension funds that manage long-term liabilities and for retirees seeking income from their investments.  Corporations are keeping high cash balances, partly due to uncertainty over future tax policy. Perhaps some of the reserves will be needed to fund pension plan deficits, which rose more than 50 percent in 2011.
• Newmont Mining noted in its recent regulatory filing with the SEC that its Hope Bay project in the far north of Canada will be subject to impairment testing.  Back in 2007 when gold prices were trading around $800, Newmont paid $1.5 billion for a 55 million ton resource that is estimated to contain 10.1 million ounces of gold. This works out to a resource grade of 5.69 grams per ton of gold. Today gold has doubled in price, but apparently there is some concern that the $900 million in estimated capital requirements to build the project may escalate beyond where the project’s returns would not be robust enough to take the risks.
• Equity issuance has been heavy recently.  Detour Gold raised about $240 million in the prior week, while NovaGold raised as much as $333 million this week, diluting current shareholders by more than 10 percent.  While the NovaGold financing represents only a small fraction of the additional $6.7 billion it will need, financing of this magnitude cumulatively takes some of the momentum out of the market.

Tags: Anc Youth League, David Rosenberg, Don Coxe, Gluskin Sheff, Gold Bugs, Gold Equities, Gold Imports, Gold Investors, Gold Market, Gold Production, gold stocks, Holiday In China, Investment Choices, Lunar New Year, Malema, Market Radar, Nyse Arca, Political Momentum, Preferred Investment, Zero Rates
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Outlook for Gold, Equities and Earnings, and USD – Borthwick, Merk, Gartman, Ortel

Wednesday, February 1st, 2012

Duration: 8:40 mins

A must see compilation of interviews with Faros Trading’s Douglas Borthwick, Axel Merk, Dennis Gartman, and Newport Partners’ Charles Ortel, who share their not-so-basic, unconventional thoughts on gold, equities and earnings quality, and the U.S. dollar.

Sources:

Charles Ortel on BNN, January 26, 2012

Douglas Borthwick on Bloomberg – January 26, 2012

Axel Merk on Bloomberg – January 26, 2012

Dennis Gartman on CNBC – January 31, 2012

Tags: Axel, Bloomberg, Bnn, Cnbc, Compilation, Dennis Gartman, Dollar, Duration, Earnings Quality, Gold Equities, Merk, Newport Partners, Ortel, Outlook
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Which Gold Miners Have the Most Upside? (Holmes)

Friday, October 21st, 2011

Since hitting $1,900 an ounce through the beginning of October, gold has declined nearly 11 percent. Over the same timeframe, the NYSE Arca Gold Miners Index lost almost 13 percent. That’s a closer performance correlation than the roughly 3-to-1 gold equities to bullion ratio we’ve historically seen and could mean the miners are finally closing the gap.

However, TD Securities Equity Research points out this interesting fact: Over a period of 18 months prior to hitting $1,900, gold rose 79 percent but TD’s basket of gold equities only increased 57 percent. The firm says this performance gap “ranks as the worst relative performance of gold equities to gold since 2001.” During the July through September period of 2008, TD Securities’ universe of gold equities declined 46 percent, while gold bullion only lost 24 percent. In October through November of 2008, the same gold equities lost 37 percent; while gold decreased 22 percent.

What’s behind today’s record disparity?

Part of it may be due to the underperformance of the explorers and developers, which, TD says, “have been hit the hardest.” The chart below shows gold miners by capitalization and their returns since April 2011. Explorers and developers have declined the most, losing 21 percent, small- and mid-cap producers have declined 6 percent and large producers lost 5 percent.

Because of the dramatic price decline in these early-stage companies, investors have the opportunity to purchase explorers & developers (E&D), often referred to as juniors, at about half of the company’s net asset value (NAV). In simplest terms, the NAV means assets minus liabilities. In fact, you can see from the chart that the current price-to-NAV level for E&D equities is sitting near record low levels…levels not seen since the financial crisis of 2008.

TD found that in seven of the past 10 rallies, gold equities beat gold—averaging a beta of 1.4 times. Looking over the next year or so, we believe the smaller gold miners are especially poised to outperform this time. As TD says, “on a rebound, we expect the best performing equities to be among the ranks of the explorers and developers.”

Source: US Global Investors

Tags: Asset Value, Assets Minus Liabilities, Chart Below Shows, Closing The Gap, Disparity, Early Stage Companies, Equity Research, Explorers, Gap, Gold, Gold Bullion, Gold Equities, Gold Miners, Interesting Fact, Mid Cap, Nyse Arca, Nyse Index, October Gold, Performance Gap, Price Decline, Relative Performance
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Gold Market Cheat Sheet (October 17, 2011)

Saturday, October 15th, 2011

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.

Tags: Bank Of England, Bullion Prices, Dollar Index, Financings, Gold, Gold And Silver, Gold Equities, Gold Market, Gold Miners, Gold Stock Prices, gold stocks, Investment Bankers, Investment Firms, Liquidations, Nyse Arca, Painful Memory, precious metals, Precipitous Decline, Silver Mining, Spot Gold, Three Quarters
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