With the monetary metal popping by a couple hundred bucks an ounce in 2016 people are coming out of the woodwork to advise us about its vast upside and on the other side of the spectrum, its dangers. I have done a lot of bitching and moaning about gold’s promoters and bashers alike, because they seem to use similar sets of incorrect assumptions from which to extend their theses. Let’s focus on one of the negative articles; in this case a negative piece on gold mining.
I think I am going to do this on a semi regular basis going forward, with both bullish and bearish articles that I think are not giving people a straight scoop (as I see it, anyway). For some reason gold stirs emotions far beyond the average asset. There is ideology, religion, politics and flat out misunderstanding in the worst of gold analysis. Gold mining can be even more misunderstood due to the sector’s unique counter-cyclical dynamics.
Gold Equities Are Not Good Long-term Investments –Seeking Alpha
I agree wholeheartedly with the title.
On March 17th, 2016 our article “Barrick Gold: Not All That Glitters Is Gold” was published. That same day Barrick (NYSE:ABX) Gold traded at its 52-week high of $15.52/share. We outlined why the bull case in Barrick Gold is unsubstantiated. Specifically we addressed that the negative implications of the Zambian loyalty problems, RSI technical indicator, relative equity valuations, credit risk assessment, high CAPEX amidst declining production, and high financial leverage challenges Barrick’s bull case.
And in less than two weeks our bearish case has already started playing out. Barrick’s stock price has declined by ~15% in the last seven trading days.
With respect to the article’s title, so why then are they tooting their horn about a prescient call on Barrick when the sector as a whole is down in a normal and expected reaction similar to that of Barrick? Why on earth are they using a 5 day chart for this long-term thesis?
BTW, what is a “Zambian loyalty”? As for the other fundamental characteristics, I’ll leave that to people who micro manage individual companies. But the famed “RSI technical indicator”? Beware fundamental analysts cherry picking one TA indicator to support their case. What, may I ask, is this mystical indicator telling us on the SHORT-term 5 day chart and what is said short-term chart telling us about the long-term thesis?
Thesis
There is more to gold-related equities than gold. They face political risk, production constraints, company mismanagement etc. These companies need to discover new gold reserves or keep mining more gold y/y. These projects are capital intensive and leave companies highly leveraged with higher probabilities of default.
In addition, reasons like gold is an inflation hedge, increase in gold demand is rising y/y and gold mining companies are increasing production are simply not true. We believe that these equities are too risky for long-term investors because they are highly speculative.
Yes, we know that all too well. Especially the company mismanagement part. Mining is a risky business.
The author is correct about gold as an inflation hedge. He is wrong about demand for the same reason in reverse that the touts who promoted ‘gold demand’ all through the bear market were wrong. The only investment worthy gold demand equation is going to come from a macro trend change away from risk ‘on’ and to risk ‘off’. Gold is also an early inflation indicator, but will be superseded by silver and commodities in a real inflationary phase.
Where the author shows ignorance is in the same area that many gold bugs do. If you are pro-inflation, you are only in gold mining for a limited time. The case for gold mining is born in the counter-cycle, as inflation signals bottom out and then begin to turn up. This is why I used to taunt the ‘gold is silver is copper is tin is oil is hogs is coal is…’ inflation gurus who at once advised buying gold stocks and oil. Gold must be out performing all of these things (plus stock markets) for the right investment (or more accurately, extended trade) environment to be in place. That environment is a natural feeder to a gold mining operation’s bottom line (sector fundamentals) and investment backdrop (macro fundamentals).
There is no factual evidence to substantiate the idea that gold is an inflation hedge
There are several reasons why gold-related equities have been favored. One of these reasons is that gold is an inflation hedge.
He goes on and on and on about how gold is not an inflation hedge, citing sources and making a case. But again, you do not get bullish the gold miners if you think inflation is a clear and present danger. By then you will have moved on to other hard assets, stock markets (especially Emerging and resource based) and even certain segments of US markets that benefit from a weaker dollar and inflation’s effects.
Then the article goes on and on about the ‘gold demand’, World Gold Council stuff. I don’t have time to cover it all and no need either. It is to be tuned out.
Here is the Macrocosm again. Tell me, what size is the “Overt Inflationary Effects” planet? What size is the “China/India Love Trade” (symbolic of global demand) planet?
You can read the article’s conclusion yourself if you want. Suffice it to say, that I agree with much of what he writes. But as is the case with 90% of articles about gold and the miners, the information cherry picked as reference and support for the thesis is flat out non-applicable to the real investment case. An article like this is just as bad (in reverse) as an article by those who touted “Chindia Love Trade!”, ‘smart money will buy gold due to strong jobs and fear of inflation’ and other promos all through the bear market.
There is only one reason I am interested in gold stocks right now (pending the macro remaining constructive and technical support) and it has to do with the four biggest planets shown above. One of them has already come in, two are in close orbit and one of them is still flying around out there in the far reaches of the solar system.
[edit] Actually, six planets are primary and the Gold rises vs. Commodities and Global Currencies planets should be larger. But the big four are still out front.
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