Gold investors learn early that one of the best ways to
leverage their exposure is to buy gold stocks. That strategy has performed
well recently. As of Friday, the NYSE ARCA Gold Bugs Index ,
which trades under the symbol HUI, had nearly doubled since its January low.
The index far out-performed the yellow metal itself, which increased in the
low double digits.
However, as one expert points out, while the hard money
community followed the rise every step of the way, the public is totally
unaware. “ Mainstream
media and leading economists throughout 2015 ridiculed gold “bugs,” said Marc
Faber , editor of the Gloom,
Boom and Doom Report . “They now find it embarrassing to talk and write
about gold stocks, which are up by approximately 100% in 2016.”
A quick search of Google News suggests that Faber is
right. Entry of a range of key “gold” and “stock” related words into the
search engine revealed not a single prominently ranked story dealing with the
breadth of the index’s* broad-based rise, which was led by issues ranging
from Barrick to Kinross, Agnico
and many more.
Nobody cares
Grant Williams,
producer of RealVisionVideos and
publisher of a financial newsletter titled
Things that make you go hmmm, agrees. “The public are generally the last
people to catch on when a bull market begins,” said Williams, a phrenic
global traveler, in a telephone call from the Cayman Islands, where he was
making his office that day.
“People don’t care about gold,” said Williams. “They care
about a rising gold price. And they generally only find out that is happening
once the media catches on. By that time much of the major gains have already
been made.”
Revenues up, costs down
The biggest drivers of the rising price of gold stocks
appear to be strengthening fundamentals. Key among these is the rising value
of the commodity itself. The fact that gold is priced in strengthening US
dollars, means that when producers convert their revenues to local
currencies, they generally also profit from a foreign exchange advantage.
On the other hand, many producing countries, such as
Canada have seen a relative decline in many production costs. These include
employee salaries, which while high in global terms, are priced in local
currency. In addition, although oil prices, which are a significant expense
in many mines, have been strengthening lately, their secular weakness has
been particularly good for mining companies’ bottom lines.
Gold mining share prices are also being driven up by many
of the same forces which are pushing up the prices of hard assets in general.
These include increasingly desperate actions by global central banks,
particularly the European Central Bank and the Bank of Japan, which - through
moves to write off their debts by means of negative interest rates - are de
facto defaulting on their obligations.
Can mining stocks go higher?
That said, as Grant Williams points out, despite their
promising start to the year, it is far from certain that mining stocks will
continue to rise, and that the sector has turned the corner. For one, many
investors were burned badly during the bear market of the past six years and
it will take time for memories to fade. “Even if mining stock momentum has
shifted, these transitions usually come with considerable volatility,” says
Williams. “They are thus unlikely to go up in a straight line.”
Coming months will give us a far better clue as to how
far the trend is entrenched. All we know right now is that the general
investing public, and mainstream media, remain out of the picture.
*HUI components.
Barrick Gold Corporation
|
Agnico Eagle Mines Limited
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Alamos Gold, Inc.
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AngloGold Ashanti Ltd.
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Compana de Minas Buenaventura S.A.A.
|
Eldorado Gold Corporation
|
Goldcorp Inc.
|
Gold Fields Ltd.
|
Randgold Resources Limited
|
Harmony Gold Mining Company Limited
|
KINROSS GOLD CORP.
|
Newmont Mining Corporation
|
New Gold, Inc.
|
Sibanye Gold Limited
|
Yamana Gold, Inc.
|
|
Peter Diekmeyer is a business writer/editor with Sprott Money News, the
National Post and Canadian Defence Review. He has studied in MBA, CA and
Law programs and filed reports from more than two dozen countries.
|
The views and opinions expressed in this material are those of the author
as of the publication date, are subject to change and may not necessarily
reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the
accuracy, completeness, timeliness and reliability of the information or any
results from its use.