SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD BULLION FLAT IN OCTOBER – GOLD MINERS DOWN 3-5%, HAVE NEVER BEEN CHEAPER
In terms of the price action of Gold, and the Miners, October was a continuation of the year to date. The general market continued upward, whether justified or not, and investors didn’t feel a strong need for an “uncorrelated” asset such as gold, which was down about 1% for the month. GDX (the ETF representing the large miners) was down 2.0%. GDXJ (the small and medium miners was down 4.8%. The two most prominent mutual funds specializing in the gold miners, Tocqueville (TGLDX) and Oppenheimer (OPGSX) were down 3.7% and 4.3% respectively. The miners have virtually never been cheaper relative to the price of gold, as discussed below, so, though it hasn’t “kicked in” yet, the leverage on the upside could (we would say “should”) be amplified when gold moves higher.
As referenced above, the mining companies, with their operating leverage, normally are more volatile than the price of gold itself. While it is true that many mining companies have suffered from poor management, including acquisitions and exploration in politically unattractive countries, over the last five years there have been many management upgrades and the mining companies we hold are generally in politically stable jurisdictions. At the same time, the mining process itself has become more efficient, and the price of energy (a major expense) is a lot lower than several years ago.
The price performance of the miners as a group, since 2011, has been dismal, to put it gently. While gold bullion is down from $1900 to $1275m the mining stocks have done a great deal worse. The following chart shows graphically what two indexes of mining stocks have done relative to the price of gold. The “XAU” is the Philadelphia Stock Exchange Gold and Silver Index, capitalization weighted. “HUI” is the New York Stock Exchange “Gold Bugs index”, equal dollar weighted of major gold miners. The chart shows clearly that the mining stocks’ valuation have literally never been cheaper relative to the price of gold. Even with no upward movement in the price of gold, the mining equities could move 100-200% upward just to “catch up”. Add to this our conviction that gold bullion itself could be many times the current price and you can see why gold related securities, the minng stocks in particular, are an important part of our investment approach.