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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Invest Like a Champion Today

Friday, February 10th, 2012

by Scott Ronalds,

Warren Buffett’s perspectives on investing are worth their weight in gold (or better yet, stocks). Invest in things you understand. Wait for the right pitch. Don’t follow the herd. Buy things you’d be comfortable holding forever.

In a recent article in Fortune magazine, Buffett lays out his views on what he considers the three major categories of investment possibilities: fixed income (currency-based investments), assets that will never produce anything (gold), and productive assets (businesses, farms, real estate).

Not surprisingly, Warren thinks that the third category is the place to be: “I believe that over any extended period of time this category of investing [ownership of businesses] will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.”

He notes, “The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period.”

Consider Buffett’s views on gold. “Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be about $9.6 trillion. Call this cube pile A. Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

There are lots of other unique perspectives in the article, which is an adaptation of his upcoming shareholder letter. Buffett fans may also be interested in watching a 12 minute segment that aired on CBS’s ‘Person to Person’ last night, in which he takes Charlie Rose and Lara Logan through his private office in Omaha.

Tags: Baseball Infield, Cropland, Exxon, Exxon Mobils, Fixed Income, Fortune Magazine, Gold Stock, Herd, Holding Period, Investment Possibilities, Metric Tons, Million Acres, Ounce, productive assets, Profitable Company, Purchasing Power, Recent Article, Runaway Winner, Trillion, Volatility, Warren Buffett
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Get Paid to Play Gold (Holmes)

Friday, November 11th, 2011

With money markets and Treasuries yielding next to nothing these days, investors are finding income in new places. One area those investors should consider is gold mining. With gold rising in value, mining companies are reaping record profit margins, yet the stock prices are depressed due to lack of investor interest. A solution for both gold companies and investors may be dividends, specifically gold-linked dividends.

Several top-tier gold producers that are benefiting from higher gold prices have begun to share a portion of their profits with shareholders via a dividend payout. Thirteen of the world’s largest gold producers are expected to pay nearly $2 billion in dividends this year, according to MineFund, making it the largest payment in gold stock history. The Financial Post also reported that miners’ dividend payments are up 75 percent on a year-over-year basis, compared to a 26 percent increase in 2010.

Yamana Gold is just one of several large producing miners to report increased revenues, expanding cash flows and record adjusted earnings. Because of the company’s strong balance sheet, Yamana increased its dividend for the second time this year to $0.20 per share annually. When discussing the enhanced payouts, CEO Peter Marrone cited that the company “continued to focus on delivering growth across all measures, enhancing shareholder value and generating significant cash flow in the third quarter.”

The latest payout represents a 67 percent increase over the past 12 months and the second increase this year.

Yamana has implemented a gold-linked dividend, which means that the amount of the dividend the shareholder receives will be linked to the average price of gold. As the yellow metal trades higher, the company would increase dividends paid out to its investors. Conversely, if gold falls in value, dividend payouts would decrease.

Eldorado Gold has also come out with a similar dividend policy, linking dividends to the price of gold. As shown in the chart below, Eldorado Gold anticipates its next dividend payout will be 67 percent higher than the previous quarter.

Barrick Gold also announced a third quarter dividend increase during its earnings release. Over the past five years, the company has increased its dividend by more than 170 percent on a quarterly basis. The company’s latest dividend—$0.15 per share— represents a 25 percent increase from the prior quarter.

Barrick estimates its third quarter gold cash margins have increased by 55 percent on a year-over-year basis, driven by the company’s leverage to higher gold prices. The company says it will continue to offer its shareholders a rising income stream while also expanding operations in Pueblo Viejo, Pascua-Lama and Nevada.

While the share prices of these miners have been punished in 2011, increasing dividends allow investors to get “paid to wait” for the market to turn around. The dividends are a cash incentive for investors to hold shares of the company and allow them to participate in rising earnings. We like that idea.

We believe gold equities will eventually be rewarded by the market and rise with higher gold prices. In the meantime, investors of gold miners may benefit from income linked with rising gold.

Read: Which Gold Miners Have the Largest Upside?

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

By clicking the links above, you will be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

The following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of 09/30/11: AngloGold Ashanti, Agnico-Eagle Mines, Barrick Gold, Eldorado Gold, Franco-Nevada, Goldcorp, Gold Fields, Harmony Gold Mining, IAMGOLD, Kinross Gold, Newmont Mining, Randgold, Royal Gold, and Yamana Gold.

Tags: Dividend Payments, Dividend Payout, Dividend Payouts, Dividend Policy, Dividends, Gold, Gold Companies, Gold Mining, Gold Prices, Gold Producers, Gold Stock, Investor Interest, mining companies, Money Markets, Price Of Gold, Profit Margins, Record Profit, Shareholder Value, Stock History, Stock Prices, Treasuries
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Gold Market Cheat Sheet (July 11, 2011)

Monday, July 11th, 2011

Gold Market Cheat Sheet (July 11, 2011)

For the week, spot gold closed at $1,544.15, up $59.05 per ounce, or 3.98 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 4.19 percent. The U.S. Trade-Weighted Dollar Index moved up 1.02 percent for the week.

Strengths

• Chinese restrictions on exports of nine rare materials, including gold, violate global rules and give the country’s manufacturers an unfair edge, according to the World Trade Organization panel. This conclusion backs a complaint by the U.S., the European Union and Mexico.
• The U.K.’s Royal Mint said that its silver coin production in the first half of the current year has doubled to 324,421 ounces. This is consistent with reports from other mints around the world, which have also seen a huge surge in silver coin sales over the period.
• Fred Hickey, author of The High Tech Strategist newsletter, recently stated, “I increased my overall gold stock positions because gold stocks are the second cheapest they’ve been relative to gold in the last 30 years (the cheapest point came in late 2008 during the liquidity crunch).”

Weaknesses

• With its new Cross-State Air Pollution Rule, the U.S. Environmental Protection Agency announced mandatory reductions in some 900 coal-fired, natural gas-fueled, and oil-burning power plant emissions that will force the closure of scores of older, inefficient power plants.
• The American Coalition for Clean Coal Electricity says the rule “would be among the most expensive ever imposed by the agency on coal-fueled power plants, dramatically increasing electricity rates for American families and businesses and causing substantial job losses.”
• Issues of heavy rains and labor strikes had been impacting Chilean mines throughout the week, perhaps deterring companies from meeting their production guidance for the year. “The copper market in particular was spooked by the ongoing labour issues at Grasberg and Chuquicamata, and latterly by the news of production stoppages at Escondida due to highly unusual heavy rains,” Sucden Financial said in a research note.

Opportunities

• India’s largest gold bullion supplier and the biggest trading arm of the government, MMTC Limited, expects to import around 275 tons of gold in 2011-12. This is compared to the 245 tons that it imported a year ago. Silver imports are expected to jump by around 30 percent to 1,200 plus tons during the same period. MMTC plans to increase its jewelry outlets from 15 to 55 by the end of 2012. The company also aims to increase its jewelry franchise base from 75 at present to 200 by the end of 2012.
• Bolivia’s mining exports should hit a new record high of more than $3 billion this year, supported by high prices for silver and zinc, according to Deputy Mining Minister Hector Cordova. This would represent a roughly 25 percent increase from the $2.41 billion record in 2010.
• Ronald Stoeferle’s Special Report on Gold noted that, “In the long run we could see a future where rather than asking for the price of gold, people will much more often ask for the price in gold. Our next 12 month target is USD 2,000. We believe that the parabolic trend phase is still ahead of us.”

Threats

• On Tuesday, South Africa’s National Union of Mineworkers (NUM) rejected the Chamber of Mines’ (CoM’s) latest wage offer and threatened to launch a strike. NUM general secretary Frans Baleni said the CoM emerged from the third round of wage negotiations “bruised.” Baleni said, “We are now ready for action. There has not been progress and clearly progress would not be coming. We have no option but to opt for a push.” According to NUM, the gold mining industry could face a strike by over 140 000 workers.
• Simon Hunt, founder of Simon Hunt Strategic Services, recently said, “with China’s real consumption remaining weak and global consumption being flat to down, together with financial markets likely to be in some turmoil later in the summer, we expect to see 3-month copper prices falling to at least $3.40/lb -down 20 percent from current levels – and possibly even $2.95 by year end.”

Tags: Clean Coal, Copper Market, Electricity Rates, Environmental Protection Agency, Fred Hickey, Gold Equities, Gold Market, Gold Stock, gold stocks, High Tech Strategist, India, Labor Strikes, Labour Issues, Mandatory Reductions, Philadelphia Gold, Power Plant Emissions, Royal Mint, Spot Gold, Stock Positions, Unfair Edge, World Trade Organization
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Gold Market Diary (September 7, 2010)

Saturday, September 4th, 2010

Gold Market Diary (September 7, 2010)

For the week, spot gold closed at $1,246.75 per ounce, up $8.65, or 0.70 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 1.45 percent. The U.S. Trade-Weighted Dollar Index fell 1.09 percent for the week.

Strengths

• According to a Citi report, the downtick in equity flows isn’t just a cyclical trend but a secular shift into fixed income. The average investor only has an ultra low 6 percent weighting in fixed income. Gold would certainly be even less. Incremental shifts toward safer investments should continue to be supportive of gold.
• The gold trade appears to be still early. If the seeds of inflation are being properly planted, gold can continue to do very well. From 1970 to 1980, adjusting for inflation, the S&P 500 only compounded at 0.80 percent rate per year for the decade while the Toronto Gold & Precious Minerals Index (adjusted to U.S. dollars) compounded at 25.1 percent return per year.
• On Friday, the acquisition activity jumped in gold stocks as a friendly and a competing hostile bid were launched for the owner of a high-grade gold discovery—one of the top discoveries of the decade.

Weaknesses

• The risk of owning the wrong gold stock—one with low-grade reserves—is heightened. Some popular companies have been cited as the next take-out targets over the past month and their share prices have been bid up to levels which would be commiserate with an $8,500+ gold price. In a competitive environment, you cannot buy low-grade ounces for top dollar and expect to earn a return on capital that is above peers.
• Although South Africa’s gold production rose in the second quarter, it was still down 7 percent in the first half of 2010 compared to last.
• According to the Royal Bank of Scotland, we are now in the second phase of the mining cycle with sideways movement and volatility becoming the trend.

Opportunities

• Bloomberg surveyed 29 analysts about expected gold price highs in 2011; the median price for the survey was $1,500.
• Gold held by ETFs in India, the world’s largest buyer of bullion, may surge as much as 17 times in the next three years as investors seek refuge from financial turmoil and inflation.
• Ernst and Young forecasts that the value of deals in the global mining and metals sector is set to soar as competition to secure raw materials heats up.

Threats

• Nouriel Roubini recently said, “If there was a double-dip recession, increasing risk aversion, some assets are going to be preferred, and gold will be one of them. But in that situation, things like the dollar, the yen, the Swiss franc have more upside in a situation of rising risk aversion because they are much more liquid than the gold market.” A counterpoint to Mr. Roubini’s thought: what is the currency of failed policies worth after such a massively failed stimulus effort?
• The National Union of Mineworkers is meeting to decide whether to expand its strikes to all operations of multiple diversified miners in South Africa.

Tags: Acquisition Activity, Bank Of Scotland, Dollar Index, ETF, ETFs, Gold, Gold Bullion, Gold Discovery, Gold Equities, Gold Market, Gold Price, Gold Production, Gold Stock, gold stocks, Gold Trade, Grade Gold, Hostile Bid, India, Market Diary, oil, Philadelphia Gold, Precious Minerals, Return On Capital, Royal Bank Of Scotland, Silver, Silver Index, Spot Gold
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