Can gold regain its luster?

Gold prices have fallen sharply from August 2011 highs at $1,883 per ounce to a close of $1,237 today, a decline of 34% in a world where most other assets have been inflated via Federal Reserve policies QE1, 2, 3…  A significant portion of the decline has come since March 15, 2013 when gold closed at $1,606.  Thus, in just the past three months, gold has fallen $369 per ounce or 23%.

Gold stocks have been under even greater pressure as lower gold prices compress operating margins.  The Market Vectors Gold Miners ETF which trades with the ticker (GDX) has fallen from $66.63 in September 2011 to $22.22 today, a decline of 67%, nearly twice the percentage decline in the metal itself.  Since March 15, 2013, when the GDX closed at $37.34, the gold miner ETF has fallen 40% vs. 23% for the metal itself.

The larger decline in the share prices vs. the metal itself demonstrates the operating leverage inherent in the shares of gold mining companies.

Many analysts say gold is heading for the $250 an ounce area where it traded for much of the 1980’s.  Should investors fear further price declines or do current prices represent a tremendous buying opportunity?

I argue that gold shares represent a buying opportunity and ‘traders’ should scale into positions from now through late-August.  Seasonally, gold and gold shares tend to rally from early September through the end of the year.  The primary reason is that jewelry demand enters the market from China and India, significant consumers of the yellow metal, as the summer ends.  In the following months jewelry is manufactured for sale during the holiday season.

There are three significant reasons supporting a low in gold prices in the near future.  First, the 2013 estimated cash cost of producing an ounce of gold worldwide is $1,300 including capital expenditures.  Excluding capital expenditures, the marginal cash cost is $1,104.  At today’s close of $1,237, prices have now fallen into a range where much lower, one by one, production at mines around the world will go dark curtailing supply available to the market which is supportive of prices.  Unlike many assets, gold resources in the ground are not a wasting asset.  They do not expire and become worthless like a carton of milk.  Further, as a long time-honored store of value, gold is also not subject to technological obsolescence as is the desktop PC.  If miners can’t make money at the prevailing market price, they’ll stop producing.  Second, sentiment or market psychology toward the metal and the shares of miners is overwhelmingly negative.  By now, most gold has been sold by ‘weak hands’ leaving current holdings in stronger hands.  Lastly, per the chart below, there is still significant investment capital available for the mining industry.  Private placements represent long term funding.  While declining, capital is well in excess of the near flat-line levels seen prior to 2003.  This ‘smart money’ wouldn’t be present if the longer term sentiment toward gold wasn’t favorable.

    https://i2.wp.com/d1w116sruyx1mf.cloudfront.net/ee-assets/channels/article_default/NumberofMiningPrivatePlacementsClosed.png

Come early January 2014, I suggest the trade be re-evaluated.  If the GDX is trading below today’s $22.22 price, I would exit the trade.  While gold bears argue correctly that the gold itself, which doesn’t pay interest, is worth less as interest rates rise on other assets, I remind readers that many senior gold producers pay dividends, therein effectively paying an interest on your investment in gold shares.  Good trading!

If you’d like additional clarity into your specific equity holdings and the market in general, please contact me at Christine Meder’s Accounting Advisory Services mederchristine1526@gmail.com to schedule a free 30 minute consultation or tweet me at @christinemeder1.  #unrbrand

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About Christine Meder
Leveraging my insights and professional experience of 25 years in the accounting profession, I and my firm Christine Meder's Accounting Advisory Services provide our high net worth clients expert advice on their business activities and investments. In addition to performing traditional accounting functions in a confidential manner, I pride myself in giving clients a competitive edge whether it be in running their businesses or managing their investment portfolio. My studies leading up to completion of the EMBA program at the University of Nevada, Reno this August provide me with latest skills and techniques utilized across a broad spectrum of business functions. This breadth of education is complemented with experience as an accountant in the construction, mining, real estate and technology fields during my career. If you are looking for a trusted adviser or consultant in addition to someone you can rely on to properly keep your books, please contact me.

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