My jaw dropped lower and lower last Thursday as I perused quarterly
reports from some of the world’s largest gold producers. Many of the results
were shockingly bad.
Impairment
charges, reserve write-downs, earnings
losses, and dividend cuts—no company escaped the fallout from lower gold
prices. Some reported bad news on every aspect of their businesses.
But here’s the most striking thing: The market didn’t care.
It’s almost paradoxical—gold stocks rose heartily that day, even those
reporting the worst results. GDX (Gold Miners
ETF), which consists solely of producers, was up 4.4%.That’s not a lack of
concern we’re seeing; it’s outright, almost reckless bullishness.
So what the heck is going on?
Earnings Down, Stocks Up
To get the full picture, first here’s a look at the write-downs and
losses reported by five of the world’s largest gold producers last quarter.
Total losses for these five companies exceed $5.4 billion. Write-downs
were $6 billion. That’s a lot of money for an industry as small as ours.
And there’s more to come: Newmont’s (NEM) report is due on
Thursday, and with reserves based on $1,400 gold, an impairment charge is
virtually guaranteed. AngloGold Ashanti (AU) could have similarly
ugly news later this week. Golden Star Resources (GSS) and IAMGOLD (IAG) will almost certainly report write-downs as well, due
to high costs and/or low grades.
But gold stocks are up. Here’s a chart of the year-to-date gains of the
same five producers, along with GDX and gold.
It’s amazing—these gains look more like annual returns instead of 45-day
results.
Why Are Gold Stocks Doing So Well?
There are several reasons…
Bad
news was priced in. Many analysts expected bad news
from the producers, so Mr. Market was looking at other factors to determine if
he should buy or sell.
Companies
are leaner and meaner. It wasn’t all bad news…
- Many write-downs and impairment charges were
one-time adjustments. Write-downs today can mean less depreciation expense
tomorrow, which can add leverage to the upside when gold rises. - Most (though not all) companies have been able
to reduce costs substantially. - A good number of companies are still
increasing production, which we expect to translate into much higher share
prices as gold rises.
The market clearly expects margins and bottom lines to materially
improve due to the positive changes most management teams have been able to
make.
Sentiment
has shifted. A number of analysts have started
to take notice of the deep valuations gold stocks offer. There’s a sense among
an increasing number of investors that the worst is over in the gold sector,
and therefore that bargains had best be snapped up while they’re still
available.
The
broader stock market is weak. There’s
an inverse relationship between gold and the S&P; more often than not, when
one is weak, the other tends to be strong—and Wall Street has been weak.
Gold
is rising. With each tick up in the gold
price, producers become more attractive. Most investors know you can get
leverage to the gold price through a gold stock, as has just been amply
demonstrated in the last few weeks.
That said, gold stocks have been rising sharply since their December 31
lows—some charts have gone almost vertical—so don’t be surprised if we see a
pullback soon. But a larger shift in the gold market is under way; we’re moving
from a two-plus-year bear market to the beginnings of a new bull market—and
that’s when we stand to make the most money.
As Doug Casey said in our recent Upturn
Millionaires video event: “You have to
look at the bright side of this resource market, and that is that it’s the most
volatile class of stocks in the world. When they become overpriced, they become
extremely overpriced, and when the market bottoms, they become unbelievable
values. And that’s where we are right now.”
http://www.caseyresearch.com/cdd/slash-and-earn-the-gold-stock-paradox
Disclaimer: This
article was posted with the permission of a third-party contributor
and the opinions contained therein do not necessarily reflect
those of Smallcappower. Smallcappower does not endorse any investment
advice provided by these third-party contributors. Please consult
your investment advisor before making any investment decisions.
Ubika
Corporation and its divisions Smallcappower, Ubika Communication and Ubika
Research are not registered with any financial or securities
regulatory authority in Ontario or Canada, and do not provide nor claims
to provide investment advice or recommendations to any visitor of this site or
readers of any content on this site. – See more at: http://www.smallcappower.com/posts/small-cap-power-disclosure#.UoJQkZEq_vw
