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Focus on... gold mining

Posted by jdavis on October 30, 2015

I won't bore you with the apocraphyl stories of how gold has held its value over 6,000 years (though it has!) or that if one's paper currency debases then gold will become increasingly valuable (though it likely would) and so on.

No, I shall simply focus on what has happened and where we are now in Gold and mining shares.

Suffice to say there is significant value in miners, as I see it.

The first chart is of Gold over the last 35 or so years.

As you can see, it was flat to down for c 20 years then it started its huge bull market in 2001.

 

 

The next chart takes a closer look at the bull market and the current bear market.

After a quadrupling, from 2001 to 2008, it fell back 30% in the general collapse of 2008 (though the stock market fell over 50%).  Then  it resumed its bull run, further nearly tripling by late 2011.  Since then it has crashed and fallen around 40%.

Volatile?  Sure.  But what isn't?

Has it seen its bottom price in the current crash?  I have no idea.  Maybe or maybe not.  However, to our way of thinking it's distinctly more attractive as an investment now compared to the last 5 years.

The next chart shows the recent (current?) bear market.

Notice the black rectangle, suggesting a flattening of the price over the last circa two and a half years.  If the Gold price rises above this 'flat' area and sustains the rise then it could be the beginnings of a new bull market (and the end of the bear).  On verra.

However, this article is about the mining companies.  Their prices are of course influenced, heavily, by the price of gold.  They have fixed costs and as Gold falls they normally lose more value than the relative fall in Gold.  But as Gold rises they normally rise faster and farther.

GDX is the index of large gold mining company share prices.  It launched in 2006.

Shares in this sector soared over 300% in 3 years from the bottom of the crash to 2011.  Now they are down 80% while the underlying commodity mined, Gold, is down c 40%.  Yet, there has been huge cost cutting in this sector and profits are returning, even with lower Gold.  It is said that the Break Even price of Gold for gold mining companies in 2014 was $1200.  It is now said to be much lower at $950.

Note too, that the index of gold mining company share prices has been lower than the lows of 2008.  Yet...the price of Gold is circa $1145/oz compared to just $700 in late 2008.  A higher price of Gold to the tune of c 40% yet the mining shares are lower?  Something is not right.

As far as we can tell there is excellent value in gold mining companies.

And to cap it, SMALL Gold mining shares are even lower.

Again, we see a flattening in share prices over the last some 2 years.

I shall correct myself.  There is extraordinary value in Gold mining shares.

I've said before, isn't it curious how investing is the only industry where the customers run out of the store when prices are on sale. (And run in when prices are high...!)  We buy quality assets that have crashed or even collapsed in price and there may be 'blood on the streets', metaphorically (normally...).  Or to quote one of the most successful living investors in the world:

Can Gold miners go lower?  Of course.  But our job is not to find THEE bottom or THEE top.  That would be ridiculous.  Our job is to find great value on a medium to long term outlook.

What are YOU investing in?  As good value as this?

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