Massive opportunity developing in gold stocks

[SafetyinNumbers]

I own a few gold miners and even a few warrants.

 

I like the macro backdrop but also there are quite a few juniors trading at very low valuations. Individual names are definitely harder but the rewards can be big.

 

[Mark Jr.]

Then can someone show me a chart of equities index to inflation vs Gold indexed to inflation?

 

upload images

 

upload

 

Blue = DJIA

Red(?) = SP500

Gold = Gold

Silver = Silver

[TwoCitiesCapital]

Gold stocks have been such a big pile of dogshit over the years that I would just stay the hell away. Treat them like drugs. Just say no.

 

If you are an awesome, big swinging dick, market timer then go for it.

 

LOL! Agree. Gold miners are perennial destroyers of capital. Calling gold miners a value play might be the biggest oxymoron I've ever heard. Let's take a look back to the beginning of Covid how did that work out for the investors holding gold as a hedge? They took an even bigger beating than the market.

 

But that's where your wrong D33pV4lue  gold is a hedge against inflation. Then can someone show me a chart of equities index to inflation vs Gold indexed to inflation?

 

Investing in gold is a fool's game why don't we just go out and buy some crypto? Not to say there arent times when trading miners isn't a good strategy, but as "long-term investors" it makes no sense.

 

Sorry for the rant I will now mute myself from adding my 2 cents so as not to disturb the people in this thread that are actually interested in gold.

 

BOL

 

I would actually argue it's a hedge against negative real rates, not inflation.

 

Typically you get negative real rates when inflation exceeds nominal rates, but that doesn't mean it hedges inflation because you can have high inflation and even higher nominal rates and gold will likely do terribly.

 

It did terribly early on in Covid b/c 1) everything gets sold in a liquidity panic and 2) deflationart pressures increase real rates which is negative for gold

[DTEJD1997]

Gold stocks have been such a big pile of dogshit over the years that I would just stay the hell away. Treat them like drugs. Just say no.

 

If you are an awesome, big swinging dick, market timer then go for it.

 

LOL! Agree. Gold miners are perennial destroyers of capital. Calling gold miners a value play might be the biggest oxymoron I've ever heard. Let's take a look back to the beginning of Covid how did that work out for the investors holding gold as a hedge? They took an even bigger beating than the market.

 

But that's where your wrong D33pV4lue  gold is a hedge against inflation. Then can someone show me a chart of equities index to inflation vs Gold indexed to inflation?

 

Investing in gold is a fool's game why don't we just go out and buy some crypto? Not to say there arent times when trading miners isn't a good strategy, but as "long-term investors" it makes no sense.

 

Sorry for the rant I will now mute myself from adding my 2 cents so as not to disturb the people in this thread that are actually interested in gold.

 

BOL

 

Wow:

 

Where to start?

 

Sure, most gold companies and most miners are not very good companies over long periods of time...but then aren't most companies like that?

 

It is really quite simple when you get down to it.  You treat gold miners like any other business.  You evaluate them for their sales, the cash flow, the free cash flow, the dividends.  You look for management that grows things over time, that provides value to shareholders, that treats things like a BUSINESS, not a hobby.

 

There are indeed mining companies that HAVE provided value over months, quarters, years, cycles.

 

There are some unusual things going on right now.  There are some gold miners that are clearly NOT properly understood by "the street", and trade at "silly" valuations.

 

For example, my family and I have been piling into a Canadian gold miner that is trading for about 1x cash flow, 2x free cash flow, and will have a NET cash balance in less than a year.  They have had problems, but solved 90% of those problems about a year ago.  They have a history of paying out dividends before their time of problems.  When you are debt free and trading for 1x cash flow....hard for it not to go up in value over time?

 

Or what about CMCL in Zimbabwe?  I've owned that for a long time.  Got back a huge amount of my initial purchase in dividends.  Not playing with "house money" yet, but getting very close.  The company is in better position today that it was 1 year ago, 2 years ago and so on.  The future looks pretty good.  I've made multiples on my initial purchase price, and expect it to continue into the future.

 

Just like any other sector, you've got to be careful with gold miners, VERY careful.

 

So yeah, when people blindly say that a sector is "dogshit"...that leads to inefficiency.  That is the way you make market beating returns, and that is what I am looking for.

 

 

[petec]

Vaccine news has created sell-off in gold but, this is very short sighted considering massive debt having been and continuing to pile up in developed countries. Fed and European Central Bank will remain super accommodative and real yields will continue to be negative.

 

Some mid-cap names offer mouth watering free cash flow yields at current prices and balance sheets are in terrific shape.

 

Names like DPM, IMG and AR are pretty interesting.

 

I made really good money on these, sold, now getting back in.

 

Cardboard

 

My apologies for being bone idle, but would you mind putting a number on the free cash flow yields you see (and the underlying gold price assumption)? That way I can judge whether to do the work!

[no_free_lunch]

DTEJD,  i had a look at CMCL, that is not a good example of a company that has rewarded investors is it?  When I look at the chart it is down over all but shorter time periods.  It looks it was 5-6x higher in the early 2000's when the last gold cycle started.

[DTEJD1997]

DTEJD,  i had a look at CMCL, that is not a good example of a company that has rewarded investors is it?  When I look at the chart it is down over all but shorter time periods.  It looks it was 5-6x higher in the early 2000's when the last gold cycle started.

 

Not sure about that...I think that CMCL in the late 90's, early 2000's might have been a true penny stock, with no significant operations?  I only know about the more modern history.  CMCL bought the Blanket Mine from Kinross in 2006.  All sorts of new management was brought in then.  Maybe recapitalized?  The whole company changed in 2005, both in terms of operations and management.  Modern management has largely delivered on what they say.  Of course, sometime things were slower than expected, sometimes it was more expensive, sometime a bumpy road

 

I bought in initially shortly after CMCL initiated their dividend (2012).  That was about 7 years ago or so for me.  The dividend yield was about 10% then.  Since then, they have maintained the dividend, and have raised it numerous times.  I have traded in & out a few times, but have been holding & adding for the past 4 years or so.  7 years is probably not a complete cycle, but it is certainly not short term.

 

Also, look to the future with CMCL.  Zimbabwe has made tremendous strides in their society and economy.  Of course, they have a long way to go, but they are generally on the right path.  Look at CMCL, they have run the Blanket Mine incredibly well.  They are about to increase production significantly with a new central shaft.  The government has invited them to bid on government owned properties.  It is expected that CMCL will bring these future properties quickly into development.  That they have the capital, experience and knowledge to get an asset up & producing cash flow.

 

Set CMCL aside, there are some other mining companies that have done incredibly well over long (decades) of time.  For example, is a 20X increase in stock value over 24 years an acceptable return?  What if significant dividends were paid all along that time, increasing the 20X return?

 

Well, we will see.

[Cardboard]

http://www.stockwatch.com/News/Item?bid=Z-C:AR-2987786&symbol=AR&region=C

 

Cardboard

[D33pV4lue]

Then can someone show me a chart of equities index to inflation vs Gold indexed to inflation?

 

upload images

 

upload

 

Blue = DJIA

Red(?) = SP500

Gold = Gold

Silver = Silver

 

I said I was going to leave this alone but the fact that you shared a graph of the price return of the Dow Jones and S&P as a comparison to Gold and Silver just blew my mind. The correct chart to share would be total return since as an owner of a company you benefit from dividends and buybacks. Also, my point was that people who say Gold is a hedge against inflation are wrong and as you will see below if you go back to 1980 and adjust for inflation Gold has a negative return!  The following is the CAGR of Gold and DJAI Total return with dividends reinvested from dates shown to Present (11/25/2020) adjusted for inflation.

 

BOLD = Gold return

 

01/01/2010 = 3.45% 10.85%

01/01/2005 = 7.89%  7.33%*

01/01/2000 = 7.43% 5.08%*

01/01/1995= 4.25% 8.49%

01/01/1990 = 2.88% 8.26%

01/01/1985 = 2.73% 9.41%

01/01/1980= -0.18% 9.12%

 

[rkbabang]

Then can someone show me a chart of equities index to inflation vs Gold indexed to inflation?

 

upload images

 

upload

 

Blue = DJIA

Red(?) = SP500

Gold = Gold

Silver = Silver

 

I said I was going to leave this alone but the fact that you shared a graph of the price return of the Dow Jones and S&P as a comparison to Gold and Silver just blew my mind. The correct chart to share would be total return since as an owner of a company you benefit from dividends and buybacks. Also, my point was that people who say Gold is a hedge against inflation are wrong and as you will see below if you go back to 1980 and adjust for inflation Gold has a negative return!  The following is the CAGR of Gold and DJAI Total return with dividends reinvested from dates shown to Present (11/25/2020) adjusted for inflation.

 

BOLD = Gold return

 

01/01/2010 = 3.45% 10.85%

01/01/2005 = 7.89%  7.33%*

01/01/2000 = 7.43% 5.08%*

01/01/1995= 4.25% 8.49%

01/01/1990 = 2.88% 8.26%

01/01/1985 = 2.73% 9.41%

01/01/1980= -0.18% 9.12%

 

 

1980 was a high year for gold, but even still, compare holding $10k 1980 dollars worth of gold with the purchasing power of holding $10k in cash for the last 40 years.  Suddenly -0.18% doesn't sound so bad.

[JRM]

Isn't that how gold is supposed to work, though?  The amount of gold needed to buy a house should stay roughly constant over time all else equal, right?

 

So isn't a 0% inflation adjusted return the expected result? 

[no_free_lunch]

I agree JRM in principle.

 

In practice, to get really pedantic,  gold prices are still subject to supply demand.  The price crashed in the 80s and part of this was due to chemical extraction processes which pushed up supply significantly.

 

I guess it's possible for the opposite to happen and for it to exceeded inflation.

[Cigarbutt]

Isn't that how gold is supposed to work, though?  The amount of gold needed to buy a house should stay roughly constant over time all else equal, right?

So isn't a 0% inflation adjusted return the expected result?

For the longest time, inflation, real estate and gold prices have had a tendency to correlate quite strongly. This has started to break down since the 1970s with real estate escaping upwards in spades (related to land prices mostly but who knows, even adjusting for houses getting larger) and with gold prices deviating strongly, up and down, but mostly up. See attached.

Disclosure: i held (indirectly) gold bars from 2003 to 2008.

[Spekulatius]

Isn't that how gold is supposed to work, though?  The amount of gold needed to buy a house should stay roughly constant over time all else equal, right?

 

So isn't a 0% inflation adjusted return the expected result?

 

Es, that’s exactly how I see it. 1980 was a bad starting point since it  was quite a bubble in Gold with the price more than doubling within a year and a year later, it halved. Part of what caused this crash were the Volker policies curbing inflation.

[ERICOPOLY]

The amount of gold needed to buy a house should stay roughly constant over time all else equal, right?

 

If real household income rises, or declines, then it may not be so.

 

[JRM]

The amount of gold needed to buy a house should stay roughly constant over time all else equal, right?

 

If real household income rises, or declines, then it may not be so.

 

As well as other variables like interest rates.  So 'all else equal' is virtually impossible in the real world, and over a short time frame like 1980-2020.

[thepupil]

I own some gold; I expect a very volatile 0% real return with some convexity/hedging benefits in the event of high inflation/some other macro scenarios.

 

I think most people outside of gold bugs view it this way, no?

[Gregmal]

What I've never understood, is why gold? There's so many other things that accomplish the same thing. For instance, why not diamonds?

[ERICOPOLY]

The amount of gold needed to buy a house should stay roughly constant over time all else equal, right?

 

If real household income rises, or declines, then it may not be so.

 

As well as other variables like interest rates.  So 'all else equal' is virtually impossible in the real world, and over a short time frame like 1980-2020.

 

While I saw your mention of "all else equal" in the post I replied to, I pointed only to "real" income because, and if gold maintains it's real purchasing power, then in theory it must stay out of lockstep with real estate if real estate is driven by real incomes (all other things being equal).

 

Does anyone know what the theoretical effect is on gold price if there is real GDP growth?  If you put the world's supply of gold (priced against all things real) on one side of the scale, and then keep increasing the world's supply of 'real' on the other side of the scale, then what happens to the purchasing power of gold?  I'm wondering if the increasing supply of real goods upsets the price equilibrium of gold in real terms.

[JRM]

Because aliens taught humans how to mine it 5,000 years ago and humans began to ascribe value to it. 

 

In all seriousness, I've wondered the same thing.  There are other metals with similar properties.  Gold is scarce, divisible, and does not corrode.  It also can't be fabricated or produced other than mining.

 

Buying physical gold is a way to exit the dollar denominated financial system.

 

Buying gold companies is more speculative on the near term prices of gold vs all in sustained cost of mining the gold.  As the mines are depleted the AISC rises, so unless spot prices rise also, the gold may not get mined.  However, if spot prices stay high there is huge optionality in these gold reserves.

[thepupil]

What I've never understood, is why gold? There's so many other things that accomplish the same thing. For instance, why not diamonds?

 

Gold is an element and therefore fungible and investable at scale (central banks and large institutions can trade gold and, absent chicanery, know precisely what they’re buying / selling), not so with diamonds (or art or air cooled 911’s or whatever)

 

I do not know this for sure but I’d expect the above ground gold supply to be far less volatile than diamonds (ie I think there are big diamond discoveries that can be large relative to existing supply). This has happened with gold several times in history, but is probably less likely to happen today than with diamonds; someone more knowledgeable  than I can opine)

[JRM]

The amount of gold needed to buy a house should stay roughly constant over time all else equal, right?

 

If real household income rises, or declines, then it may not be so.

 

As well as other variables like interest rates.  So 'all else equal' is virtually impossible in the real world, and over a short time frame like 1980-2020.

 

While I saw your mention of "all else equal" in the post I replied to, I pointed only to "real" income because, and if gold maintains it's real purchasing power, then in theory it must stay out of lockstep with real estate if real estate is driven by real incomes (all other things being equal).

 

Does anyone know what the theoretical effect is on gold price if there is real GDP growth?  If you put the world's supply of gold (priced against all things real) on one side of the scale, and then keep increasing the world's supply of 'real' on the other side of the scale, then what happens to the purchasing power of gold?  I'm wondering if the increasing supply of real goods upsets the price equilibrium of gold in real terms.

 

In theory GDP gains would be deflationary if the gains are due to efficiency improvements (technological improvements).  If we're pricing gold in terms of USD, then I think money supply has to be part of the equation, too.

 

The best interview I've heard so far about inflation vs deflation was with Lacy Hunt on the End Game Podcast (Jim Grant).  He says we're on the tail end of a 40 year deflationary period.  He says we are still in a period of deflation, but there is a real risk of hyper-inflation depending on fed policy.

[ERICOPOLY]

If we're pricing gold in terms of USD, then I think money supply has to be part of the equation, too.

 

The value of gold will still be real no matter what the money supply is, because the supply of gold won't increase (aside from mining).

 

I'm just wondering how gold can maintain it's real price if it's supply is fixed on one half of the scale, versus increases in supply of real goods and serviceso the other side of the scale.  The USD is irrelevant, just the real price of gold in consideration.  I'm wondering why gold's real value wouldn't increase in that scenario in order to maintain supply and demand balance on the scale.

 

If you are predicting deflation in goods, then the same aggregate amount of gold can purchase more goods.  The real value of gold has therefore increased, no?

 

[ERICOPOLY]

Further, why is gold a suitable money when rising real production would be rewarded with deflation?

[JRM]

Further, why is gold a suitable money when rising real production would be rewarded with deflation?

 

It's not ideal money if a country relies on deficit spending to fund the government expenses. 

 

Think about earning $1000 worth of gold (or any fixed base currency).  Ten years from now deflation results in increased purchasing power because you can buy more with your $1000 of gold if you saved it.  Inflation, on the other hand, is a tax.