Category Archives: Gold

Miner ETFs VS individual stocks

Depending on where you look on the web, you’ll find a different average cost for miners to pull gold out of the ground.  Whichever amount you choose to believe, you can fairly estimate that gold is currently selling at or below the cost to mine it.  Thus, the miners are not likely to be profiting.  Hence, their stock prices are currently trading at a significant discount (see my article on Why stock prices for mining companies can go so low).

I like the miners because when the price of their respective commodity drops significantly, they can scale back operations and go into more of a survival mode, by cutting production and lowering expenses until the commodity price starts to re-elevate. Once the commodity hits a price that becomes more profitable, they can kick things back into high gear while having learned a few lessons in efficiency due to the downturn.  Their biggest objective during the downturn is make their debt payments.

And that’s why I like holding ETFs over individual gold stocks.  Since I don’t have the time to investigate each of the miners and learn how each manages its debt (as well as many other business factors), I know that by buying an ETF, I’m buying the average.  Some companies will do well, and some will not do so great.

In fact, some companies will do so poorly with their debt that they may go out of business.  Since the actual mine is the collateral of the loans, what is likely to happen should a miner go out of business?

Well, the debtor would come in and foreclose on the property.  But the debtors can’t do anything with those mines as they are in the lending business, not the mining business, so they would just turn around and sell the mine to another mining company (or more realistically, one of the better managed miners will first step in and buyout the company/debt for a discount).

Thus, if you are in an ETF that holds many mining companies, you are likely to get that mine back through another company in the ETF.  So it sort of all comes out in the wash, which is another reason why I like holding an ETF over an individual stock at this point in my life (see about me page).  For every company that significantly under performs, another company is likely to significantly outperform.  You do give up the chance for even greater gains but you gain security of knowing you didn’t pick a catastrophic company (see my article about knowing your risk tolerance.)

I have developed a proprietary investment technique for stable investing which I’ve developed over my many years of successful investing while going through major life changes. Having the knowledge above alone is not enough. You need to implement a stable, intelligent investing technique to get substantial, stable gains while protecting yourself from losing money.  I intend to release my technique in a membership section in the future. Please Join my mailing list to be notified when it will be available.

 

Have the Gold Miners hit bottom?

Gold is up about 3% over the last couple weeks and that increase has translated to even larger gains in the gold miners.

2014-01-03-Gold-Increase

2014-01-03-GDX-Increase

2014-01-03-GDXJ-Increase

Backing up what I wrote in a previous article, “Is it better to invest in Gold or Gold Miners?“, after a large decline, you can see that a small gain in gold translates to much larger gains in the miners, with nearly an 8% increase in the large cap miners and 14% increase in the junior miners.

So have we hit the bottom and will gold and the gold miners take off exponentially from here?

I have no idea.  My technique is not to try and predict the market but to invest wisely with a proprietary long term, stable, technique.  I know that the sector has gotten beat down immensely, so, due to shorting and other factors, I know there is likely a higher probability that it is undervalued than it is overvalued.

If you haven’t started investing in the miners, now is a good time to get involved in the gold miners.  By “get involved”, I mean you should buy a small amount, maybe around 5% of your portfolio, not throw a large amount of your investment portfolio at it.

My proprietary technique of investing involves only purchasing into a sector as it is out of favor and on its way down, which is when it is most likely to be undervalued in the long term. So if the market shoots up from here, you’ll get a nice gain from your initial involvement. Don’t chase after the gains by adding more as the price goes up.  Hold on to the rest of your portfolio as there will be plenty of other opportunities in other sectors as the volatile market money flows shift over time.  Don’t be in a hurry to get all your portfolio into the market.  Keep lots of cash ready for “the next big thing”; there will be plenty of them.

If the miners settle back down and continue their decline, with my technique, you’d continue to make purchases at “minor” and “major” levels from YOUR initial purchase.  This way, your investment technique is tailored to your own involvement and starting point.

I get upset with investment advice that follows an adviser’s portfolio which may have started long before you started following the adviser.  That adviser’s portfolio usually shows a gain, lets say 20%.  You get involved at that point, then it drops by 15% and the adviser points out that the portfolio is still up 5%, so he/she thinks himself/herself brilliant, meanwhile you are down 15%.

I also don’t think there is one strong buy point as a lot of technical analysis will try to indicate.  Often you hear things like “once it crosses the X moving day average” or “after this other thing has a selling on strength day”, or “crosses this level of support” is the time to heavily load up on a stock or sector.

With my proprietary investing technique, I’ve made my strongest gains when I invest in sectors and purchase as a function of my own starting point.  I don’t get emotional and try to predict what is going to happen.  I start my investment when I think the sector is already highly undervalued and continue to build my position as it becomes even more undervalued.

So, at this juncture, I suggest you start to get involved in the miners and potentially begin to build your position.  In the not-too-distant future, I will create a membership section and give a better understanding of how you can use my proprietary investment technique for stable investing and long term gains.  Please join my newsletter to keep updated.

Is it better to invest in Gold or Gold Miners?

Even after its significant recent decline, it’s interesting to see that over the last seven years, gold has doubled in price, while the over the same period, the gold miners, as a sector, has declined.

In the charts below, the top chart, Gold is represented by the gold tracking SPDR Gold Shares ETF (GLD), which trades at 1/10th of the actual gold spot price.  The index, representing 1/10 gold spot price was around $60, meaning told was at $600/ounce in 2006.  It nearly tripled to $180 and has come back to be at $120, double its early 2006 price.

The lower chart shows the miners index as represented by the GDX Market Vectors Gold Miners ETF.  Over that same seven years the miner index is currently down from $40 to $24, nearly a 40% decline.

Gold vs GDX Gold miners over the last 7 years

Per my previous article on the exponential profitability of the gold miners as the price of gold raises beyond the miners expense level reasons, you would think that if the gold miners were at one value seven years ago and gold has doubled, the miners would be at a higher level today, possibly even an exponentially higher value than seven years ago.

However, if you look at the chart below which starts from the major dip in mid 2008, you’ll see that the miners can exponentially outperform the the price of gold when coming off of a deep decline.

Ratio of gold to gold miners since mid 2008

The blue line in the chart above represents the miners and the red line represents gold.  You can see that around mid 2011 the gold miners were drastically higher than gold; nearly 120% higher.

The reason that gold has outperformed the miners over the last seven years is because gold had just come off of a major increase seven years ago so the miners were already blown up to a peak. Take a look at the action starting at 2011 in the charts above to get a visual feel for how this same thing happened starting in 2011.

Golds recent decline has really hit the miners extremely hard and they have come exponentially down because both the declining action of gold and the negative market sentiment of the miners have weighed on the miners (see my article on whether gold mining stocks move in relation to gold or market setiment).

This is the cycle.  Gold springs up and the miners jump exponentially higher.  Gold goes down and the miners shoot exponentially lower. We are currently somewhere in a big decline that has brought the miners exponentially downward.  Depending on where you buy, you’ll get very different results.

Thus, based on the above charts, if one wanted to invest in gold or gold related investments and was to ask me which would be a better investment, I would have two answers.  If you were choosing to invest at any random time without previous or current knowledge, I would suggest you invest in Gold as it is more stable over the long haul.

However, today’s current timing presents a major buying opportunity, in that we are currently in a very large decline that is setting up for the miners to exponentially outperform gold as happened from 2008 to 2011.  So if one were to include past and current analysis in to account, I  would suggest that at this current time, one should be purchasing gold miners.

I have developed a proprietary investment technique for stable investing which I’ve developed over my many years of successful investing. Having the knowledge above alone is not enough. You need to implement a stable, intelligent investing technique to get substantial gains and keep from losing money.  I intend to release my technique in a membership section in the future. Please Join my mailing list to be notified when it will be available.

 

Do Gold Stocks move with Gold or the Stock Market?

I recently came across an article that referred to research that, over the long haul, 50% of Gold Miners price moves are based on the price of Gold and the other 50% is based on the stock market.

The article doesn’t go into what it means to move “based on the stock market”, but the author comes to the conclusion that if you are in the Gold miners to get an amplified move on Gold the historical odds are against you.

I though that was a pretty poor conclusion to obtain from that research.

First, of course Gold miners aren’t going to move 100% perfectly in an amplified manner to the movement of Gold.  It seems logical that some portion of the movement in miners is going to be based on the business of mining gold as well as market sentiment of the sector (read my article on how market sentiment affects the gold miners).

I interpret this 50/50 research to help strengthen the argument that now is the time to be getting into the gold miners as both sides are strongly pulling down on the gold miners.  The price of gold is falling, so right now, the miners are less profitable.  Because the price of gold has dropped so much, miners are less profitable and the market sentiment towards mining stocks is incredibly low.

Below is a chart of the ratio of the Junior Miners vs the relative price of Gold (as reflected by the Spider Trust GLD which virtually tracks the price of gold).

Radio of GDXJ to GLD (gold) over the last 3 years

Notice that the ratio of Junior Miners to the price of gold has drastically decreased over the last 3 years.  That means that Gold has drastically outperformed the Miners. Or you could say that Gold’s decline has been amplified in the miners.  If the two move perfect correlation without any amplification the ration would stay the same, and there chart would show a line straight across the graph.

Below is a graph of the ratio of Gold Miners to the Dow Jones Industrial average:

Ration of Gold Miners to the dow jones industrial average over the last 3 years

This graph also shows that the Junior Miners have significantly underperformed the Dow Jones Industrial Average.  Again, if the miners were in perfect correlation with the Industrial Average, the graph would be a straight line across the page.

So there’s a double witching happening.  Both portions of the “50/50” research outcome are working against Gold.  So when the turn around in the price of gold comes, there will be a double amplification in the opposite direction to keep the 50/50 rule in tact.  That will spell monster gains for the Miners as the sentiment will turn around and not only will the lost ground need to be recovered but the euphoria in the opposite direction will be required to compensate for the lost ground over the long term.

 

 

Why are the values of gold and silver mining stocks going so low?

With the price of gold taking over a 30% drop from its most recent peak in October of 2012 and nearly a 35% drop from its all time high in September of 2011, the precious metal mining sector has been absolutely crushed.

Specifically the large cap Market Vectors Gold Miners Index ETF fund (GDX) has dropped 58% and the small cap Market Vectors Junior Gold Miners ETF (GDXJ) has dropped 65% from their most recent peaks in September of 2012.  They are down substantially more from their all time peaks (65% and 80% respectively).

So why have the miners taken so much more drastic of a plunge than gold itself?  The following is a simplified analysis to help you get started understanding the answer.

Over the last hundred years (or so) we’ve removed all the easier to find gold from the near surface of the earth, and now miners have to do a lot more work, in more remote locations, while using bigger and more powerful equipment to get at harder to access deposits in the earth.  And that work and equipment costs more and more money.

If you add up all the expenses it takes for a company to pull as much gold as they can out of the ground in a year, then divide it by the total weight of that gold they extracted in that year, you get an average cost per weight that it takes for the company mine gold.

If that average price to mine gold is below the current price of gold, the miner obviously loses money when they sell their extracted gold.  If the price they can sell the gold for is greater than their average cost to pull it out of the ground, they obviously make money.

The kicker is that when the price of gold is bigger than than the cost to mine it, every extra amount that the selling price of gold goes up is pure extra profit.

Lets take an example.  Say it costs the mining company $1300/oz to extract the gold and get it ready to sell.  And, say the current price of gold is $1400/oz.  The miner profits $100/oz.

Now say that the cost to mine remains the same at $1300/oz, but the price of gold rises to $1500/oz.   Now the miner profits $200/oz.  So the miner’s profits doubled without them doing anything different.

A company who’s profits double, is (in simple terms) worth twice as much, or will have a 100% increase in value above its price before the profit change.  Whereas in the scenario above, gold only increased in value 7%.  So a 7% increase in gold price, caused a 100% increase in the value of the average company mining it.

From the example above, you should be able to see that relatively small changes in the price of gold can have significant impacts on the profits, and therefore, the trading prices of gold mining companies.

Currently, depending on what source you find and decide to believe, the price of gold is near or below what it costs for for an average mining company to mine it.  So the mining companies are, on average, losing money.

If a company loses money for more than a short period of time, it is likely to go out of business.  A company that is likely going to go out of business is worth very little and nobody wants to buy it.

So with the price of gold going down, and the miners seemingly losing money, it appears as though miner stocks are not worth purchasing, and their trading prices have plummeted to those apparent levels.

Beyond the basic examples above, it is also helpful to know that pricing gets taken to extremes as the sum of people trading in the market make up a virtual mob that is actually quite emotional. When things are going in a certain direction, the mob becomes increasingly focused in that unilateral direction and pays less and less attention to the extremeness of the trend.

It starts with the basic economics of supply and demand. Because just about everyone is doing the same thing, there is usually not enough of whatever the mob is buying (supply) for the amount of people in the mob trying to buy it (demand).  Therefore the price of that thing goes up to balance the limited supply and growing demand.

In the opposite direction, as is happening with the miners, there is too much supply because everyone is selling, creating an oversupply, and the price therefore goes down.

On top of this, add in the effect that people psychologically see that a trend is happening and expect that it will go on forever and you get an extreme overall sentiment in the mob.  People see that everyone is doing something, and expect that because everyone is doing it that same thing it will go on forever.  So it becomes seemingly obvious that one should join the crowd.

We saw this with the housing bubble.  People bought houses because they prices were going up so drastically.  If you didn’t by a house “now”, you’d never be able to own one, because the prices just kept going up and up.  Loans were easy and cheap so people bought as much house as they could afford the payments on, expecting that if anything went wrong, they could just sell the house for a profit as everyone had heard about “those people” that bought a house and sold it a few months later for a 50% profit.  This caused prices to surge.

Of course the reverse also turned out to be true.  When the short term interest rates on those easy loans started adjusting up, people could no longer afford the payments on their homes and suddenly everyone started having to sell their houses.  With virtually everyone selling and nobody buying, the prices plummeted.  Many homeowners, even though they could afford their payments, walked away from their houses, because there was “no way it would ever get its value back”.

Bringing this thought pattern back to gold and the gold miners, we currently have a situation where the price of gold and the miners are going down.  So we have a trend that is snowballing downward.  The mob is becoming unilaterally focused on the downward trend.  People believe that because the price of gold is going down, it is going to continue going down forever, and therefore the miners are never going to be profitable again.  So more and more investors are joining in on selling and “cutting their losses”.  So the miners seem to have virtually no value and their stocks are trading at such a value.

Now… there’s one more effect I need to mention that adds to exponentially increase the already exponential effect of the mob mentality.  And that is the wonderful and exciting ability for market participants in the mob to “short” sell a stock.  This means that a company (stock) can be sold by a person that doesn’t even own it!

What?!!

Yes, that’s right! And you can even short sell gold!  Yes, there are ways to sell gold that you don’t even yet own!

As this article is already getting long, we can get into the details of “short” selling stock and gold in another article, but for now you just need to know that people try to profit on the downtrend of a stock or commodities price.  They “sell” a stock they don’t yet own, and if the price goes down, they can make money.

This (somewhat virtual) selling makes it look like the mob is more focused on selling than it really is. This amplification effect causes the a fore mentioned psychological reasons to sell to be exponentially stronger, as the situation looks like even more of the mob is aligned in one selling direction, causing the trend to look even more negative.  A trend develops and the psychological effect to join in and sell before the value becomes worthless sets in.

So the miners are currently really getting hit hard by all these effects and their prices have plummeted.

So is it time to invest in the mining sector?

I have been buying and I believe it is a great time to start purchasing down in a proprietary pyramid fashion that I’ve developed over my years of successful investing, and I’ll discuss what that means and give deeper reasoning why I believe its time to purchase the mining sector in another article.

Join my mailing list to be notified when it comes out!

UPDATE:  See my article on ETFs creating shares for short positions for yet another reason why miner ETF prices get overly extended on the down (and up) side.