Gold Miners Comparative Analysis Table
For your reference, we publish the table below on a weekly basis.Â It compares the operations of the 12 largest gold miners, by market cap.
It is a sampling of our in-house analysis tools that are customized to capture the key metrics of the gold mining business.Â The complete table, available to subscribers, encompasses a mountain of painstaking data gathering that we keep updated on a monthly, quarterly and annual basis as the information is released.Â The weekly recap follows the table.
Click on the Table to open in a new window and enlarge.
Hey Mike…You Want to Go?
It is said that to be a successful boxer, and coincidentally a successful investor, one must utilize both the skill, and the art form of the discipline.
The primary skill in boxing is punching. The effectiveness of a punch depends on distance, leverage, and timing. If you manipulate the distance between two opponents, it will have a direct affect on the leverage and timing of the punch.
Its simple, if you stand too far away from your opponent you canâ€™t hit him. If you stand close to your opponent, your punch is hard and fast. But, you have to keep in mind that the distance between you and your opponent also dictates if you can be punched, weâ€™ll call this risk.
Intimidation falls within the art of boxing. It causes fear in your opponent and gives you an advantage. Although intimidation is a useful tactic, it alone wonâ€™t win a fight. Unless your opponent runs out of the ring, you will have to throw punches.
In his prime, Mike Tyson used both the skill, and the art form of boxing to brutalize opponents. Although some may have wanted to, none of Tysonâ€™s opponents ran out of the ring. Â In all of his fights, some more than others, Tyson had to punch his opponents to win. Intimidation helped, but punching is what put his opponents on the mat and made him one of the most successful and feared boxerâ€™s of all time.
My point in all of this is â€¦ intimidation only takes you so far; it wonâ€™t win you the fight.
We, at Gold Miners, believe that the current gold market fight is being fought by intimidation and no real punches have been thrown. So, keep your wits and donâ€™t run out of the gold ring. A knockout blow has not been delivered. In the end, gold will win the fight, it just may take more rounds than we had hoped.
Gold, The Fed, and the 10-Year
Gold began the week trading at US$1,391.50. As I submit this weekâ€™s recap, the gold price sits at US$1,297.40, a 7% drop. This significant drop in price is painfully reminiscent of this past April, which saw gold fall 12% over three days.
To put these momentous price declines into perspective, lets look at them from a statistical point of view. The April gold decline was the biggest in 30 years and equated to a 7.5 standard deviation event.
With a little research on statistical methods, you will find that a 7.5 standard deviation event occurs once every billion years. This weekâ€™s decline was not as rare; Thursdayâ€™s move is only an approximate 4 standard deviation event, occurring once every 43 years.
Although I feel privileged to witness these historic events because of their improbability, I would rather experience these types of odds by winning the lottery. I would also feel safer knowing that unlikely events are still unlikely events because I am playing golf next Tuesday and donâ€™t want to get hit by lightning!
This weekâ€™s gold decline was likely a reaction to the comments made on Wednesday by Ben Bernanke, following the FOMC (Federal Open Market Committee) meeting. As soon as his comments hit news wires, gold began to leak and closed the day with a slight loss. Overnight, in the Asian markets, gold continued to leak and just before the open of the U.S. markets Thursday morning, the leak became a hole and the gold price sank.
Early in the week, the financial press expected Mr. Bernanke to reveal that the Fed would begin to taper its Quantitative Easing (QE) program. As evidenced by numerous news stories, they would have you believe that this is what he said.
However, what he actually said, in reference to QE and the economy was, â€œIf things are worse we will do more. If they are better we will do less.â€ This sounds to me as a, we will wait and see what happens statement, not a, we are going to taper statement. The market obviously thought the latter, and consequently, pretty much everything sold off.
As a word of investor encouragement in the midst of the market mayhem we offer you a quote from the June issue of our newsletter,
â€œNevertheless, we are persuaded by the fundamentals that broad, persistent and increasing demand for gold will continue to outrun a significantly constrained supply pipeline for years to come, and weâ€™ll make our case in the pages to follow.Â For the moment, we would offer our intrepid subscribers some comfort in the fact that the gold sector has been here before, and quite recently.â€
In the midst of the Global Financial Crisis, gold fell from $906.50 on Oct. 8th to $718.30 just 35 days later, representing a waterfall of 21%.Â From there, â€œgold staged a steep and relentless 3 year bull market run, peaking above $1,900 on August 22, 2011, representing a return of 170% and leaving all other investment classes, including major U.S. stock markets, floundering in its wake.â€
We also point out in the newsletter that the declines in the gold price are in stark contrast to exploding physical demand around the world, lead by Asia.Â To highlight this point, a recent news story reported that folks in Vietnam were paying a $217 premium over the spot price.
Although this is a topic for another week, I want to draw your attention to the 10-year rate. Since the beginning of the year, this key benchmark has risen 85 basis points from 1.60% to 2.45%.Â It seems small, but thatâ€™s a gargantuan increase in rates of 53%.Â This is not a trivial increase, it reflects a fairly large increase in borrowing costs needed to finance the U.S.â€™ historic budget deficit.
A review of the monthly U.S. Treasury TIC report reveals that the bond sell-off we are witnessing this week actually began in April with massive selling of U.S. Treasury securities by Japan and Singapore.
Therefore, it goes without saying that Mr. Bernanke is watching this rate very closely and will certainly step on the QE gas pedal if it gets too high. The reason this is important to us is because it has implications for gold. If Mr. Bernanke does hit the metaphorical QE gas pedal the gold price, along with other commodities, will go along for the ride.Â To put it mildly, it would be inflationary.
For those of you who like charts, this is what the week looked like for the gold price.
Â Gold Stocks and All-in Costs Rule Goldman Sachs
One reason why we at Gold Miners keep an eye on the gold price is because it dictates the revenue for our favorite group of stocks, coincidently also referred to as Gold Miners.
Quite simply, gold stocks provide leverage to the price of gold. The reason for this leverage is because you can buy a share of a gold miner that represents buying an ounce of gold in the ground for cheaper, very much cheaper today, than purchasing an ounce of gold above ground, at the spot price.
As a practical example, you can buy Goldcorpâ€™s 66.86 million ounces of proven and probable gold reserves at todayâ€™s market cap for $291 per ounce (see table above).
Unfortunately the leverage works both ways. When the price of gold rises, gold mining shares rise by more and conversely, when the price of gold declines, gold mining shares decline by more.
Downside leverage on gold miners, represented by the HUI index, worked as we would expect it to with an 7% decrease in gold price, and fell -12% this week.
Again for the chart people â€¦
Â (click to enlarge)
One of the things we track on our Gold Miners Comparative Analysis Table is the all-in cost to produce an ounce of gold of the gold miners. You will see from the table above that Goldcorp, which is one of the lower cost producers, has an all-in cost of US$1,238.
Many of the gold miners we follow have an all-in cost which is higher, some by a large margin. At the current gold price of US$1,300, many gold producers may have to shut down mines because they are not profitable.
Obviously, when gold mines close because of low prices, it affects the supply of gold. When supply is constrained, prices usually go up. A well-known resource speculator, named Rick Rule, is often quoted saying â€œthe cure for low prices is low prices.â€ This is the situation that gold and the gold miners are currently facing.
One last noteworthy news story regarding the gold miners was entitled One of the Great Gold Bears Reverses Course. Interestingly, the Great Gold Bear is Goldman Sachs, the same brokerage house that told their clients in January to short gold prior to the large April price decline.
The high-profile broker from Goldman Sachs, Richard Coppleson, was quoted declaring â€œAs Iâ€™ve always said, I would invest in gold when I felt the froth was out. Now looks like that time.â€ We agree with Mr. Coppleson, at current price levels, gold miners represent great value.
Heâ€™s a little late to the party as regulatory filings in May indicated that legendary investor George Soros had taken a $264M position in the gold sector.
And, that is it for this week. I hope you have enjoyed this weekâ€™s recap. If you want more information, visit the Gold Miners website and you will find additional Gold Miner Comparative Analysis Table values, free access to our 4 part wealth series, and this month only, we are providing our June newsletter for free.