Don’t Fear a Normal Gold Correction

Investing in Asian Mining Indaba 2012 Online Preview

I spent the latter half of last week at the New Orleans Investment Conference, talking with investors, mining companies and analysts about the state of the gold industry. The annual conference falls at an interesting time of the year, as the price of gold typically corrects in October. In fact, going back 30 years, the historical seasonality of gold has been to rise during September, with a subsequent correction in October. 

This fall, gold has followed this historical trend, with the metal climbing throughout the month of September to reach a high of $1,790 an ounce on Oct. 4, only to have a normal correction to $1,701 by Oct. 24. This decline typically comes ahead of the Love Trade fueling demand prior to the Hindu festival of lights, Diwali, which begins in November.

Miners, Show Me the Money!

At the conference, I’ve been discussing the multiple forces squeezing the profits and earnings out of gold miners, causing equity investors to become the Rod Tidwells of the gold world, getting miners energized to “Show me the money!” In my opinion, this phenomenon highlights the importance of selectively choosing among those gold companies that exhibit the best relative growth and momentum characteristics to help obtain outstanding investment results. 

My workshop presentation in “The Big Easy” integrated preeminent thinking from multiple gold experts, including research firm CIBC, Gold Fields and the World Gold Council, about how gold companies’ performance has been neither “big” nor “easy.” There’s been a decline in production per share, an 80% increase in the average cost per ton of gold over the past six years, and a 21% decline in global average grades of gold since 2005. Cash taxes per ounce of production have increased dramatically, and, according to CIBC World Markets, the replacement cost for an ounce of gold is now $1,500, with $1,700 as a sustainable number. Cash operating costs eat away the most, at $700 an ounce, while sustaining capital, construction capital, discovery costs, overhead and taxes eat up $800.

At the Oct. 24 gold price of $1,700 an ounce, only $200 is left over as profit, says CIBC.

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