If the market really starts to fall what happens to gold mining stocks? I remmember in 08' gold stocks fell just as hard as others. Could this time be different as Gold keeps reaching new highs, maybe these stocks will do well. Does anyone have any thoughts on this?
Take it easy. Not a YANK and this is a forum, just asking questions like the 10s of thousands before me.
Gold miners will soon feel the bullion effect By Jim Slater The gold price had a large fall recently, partly as a result of the CME, the USâs biggest futures exchange, increasing margin requirements by 27 per cent. After a parabolic rise, a setback was inevitable, but my view is unchanged â gold is still in a powerful bull market. Gold has a special place in the human psyche. Unlike fiat currencies, which have always failed, gold has endured as a protection of wealth for more than 6,000 years. The arguments for buying have never been stronger. Gold is increasingly accepted as a currency and haven. Unlike other currencies, gold has no debt. Central banks have switched from being net sellers to large buyers. During the first half of this year they purchased more gold than in the whole of 2010. Also, gold mining companies have drastically reduced their hedging programmes. Exchange traded funds and very low interest rates are other helpful factors, making it much easier and less costly for private investors to own gold. For years, the Chinese government has been encouraging its population to buy gold as part of their personal savings programmes. In 2010 China imported five times as much gold as in 2009. As the worldâs reserve currency, the dollar should be the bedrock of the international monetary system. Unfortunately its collapse is inevitable. US national debt has risen to $14,000bn and the unfunded liabilities of social security and Medicare combined are now more than $100,000bn. How can this be financed without further devaluation? Fiscal policy throughout the world is very uncertain â always good for gold. The sovereign debt crisis especially in Europe hangs over the market. With QE1 and QE2 a lot more money has already been printed and pumped into the global economy. More may be on the way. Although demand is growing fast, the supply from mines is flat. Most of the worldâs easy high-grade ore has already been mined. Gold is not in a bubble â it represents under 1 per cent of global financial assets. Remarkably few people own gold coins. The total market capitalisation of all of the worldâs gold stocks is only a little more than the capitalisation of ExxonMobil and Apple combined. The Junior Gold Fund, in which I have a substantial interest, started its life in September 2009 when gold was breaking through $1,000 an ounce. At its high Junior Gold had risen by 84 per cent whereas gold was up only 53 per cent. Today the position is reversed with gold up 85 per cent against a rise of 61 per cent by Junior Gold. The disconnect between the rising gold price and falling gold shares continues to surprise me. I do not buy the argument that gold shares are just shares and stock markets are falling at the moment. The recent rise in the gold price will produce a massive boost to gold mining profits. When it is ready the market will recognise this. The main advantage of gold shares versus gold is their leverage. Take the example of Spanish Mountain Gold, in which I own almost 10 per cent. This Canadian listed mining company has growing resources of 4m ounces in British Columbia, one of the worldâs safest and most favourable mining jurisdictions. A recent preliminary economic assessment indicated that the planned mine would be very profitable at a gold price of $1,100 per ounce and that, in the first five years, cash flow before tax and capital expenditure should average about C$120m per annum. Because of past losses and favourable tax incentives, there should be no taxes payable in cash during the first few years. At a gold price of $1,800 the figures would be remarkably better. With estimated production in the first five years averaging 213,800 ounces per annum, the additional potential cash flow before tax would be an extra C$150m per annum. This would result in pre-production capital expenditure estimated at C$382m being repaid very quickly, leaving the company debt-free with estimated cash flow before tax of C$270m per annum against a present market capitalisation of C$110m. This kind of leverage is the main attraction of gold mining shares compared with gold bullion. There is always the possibility of a takeover at a substantial premium and many gold mining companies have additional exploration potential. For example, Spanish Mountain has gold anomalies that could add to resources and an exciting copper anomaly with a geochemical signature 3km long and 0.5km wide. Compare gold mining stocks today with quoted companies dependent on increased consumer spending. Gold mining companies are benefiting from the tailwind of the gold price that is massively increasing their revenue and future cash flow. In contrast, companies that rely on consumer spending are likely to run into a very strong headwind. I know where I would rather have my money. Jim Slater is an active private investor and former corporate raider. His website is www.jimslater.org.uk
pls understand that although gold price is a very important factor in gold mining stocks, the miners are needless to say stocks, a different asset class with a whole lot of other exposures.