My jaw dropped lower and
lower last Thursday as I perused quarterly reports from some of the world's
largest gold producers. Many of the results were shockingly bad.
Impairment charges, reserve
write-downs,
earnings losses, and dividend cuts—no company escaped the fallout from lower
gold prices. Some reported bad news on every aspect of their businesses.
But here's the most
striking thing: The market didn't care.
It's almost
paradoxical—gold stocks rose heartily that day, even those reporting the
worst results. GDX (Gold Miners ETF), which consists solely of producers, was
up 4.4%.That's not a lack of concern we're seeing; it's outright, almost
reckless bullishness.
So what the heck is going
on?
Earnings Down, Stocks Up
To get the full picture,
first here's a look at the write-downs and losses reported by five of the
world's largest gold producers last quarter.
Total losses for these
five companies exceed $5.4 billion.
Write-downs were $6 billion. That's a lot of money for an industry as small
as ours.
And there's more to come:
Newmont's (NEM) report is due on Friday, and with reserves based on $1,400
gold, an impairment charge is virtually guaranteed. AngloGold Ashanti (AU)
could have similarly ugly news later this week. Golden Star Resources (GSS)
and IAMGOLD (IAG) will almost certainly report write-downs as well, due to
high costs and/or low grades.
But gold stocks are up.
Here's a chart of the year-to-date gains of the same five producers, along
with GDX and gold.
It's amazing—these gains
look more like annual returns instead of 45-day results.
Why Are Gold Stocks Doing So Well?
There are several
reasons…
Bad news was
priced in.
Many analysts expected bad news from the producers, so Mr. Market was looking
at other factors to determine if he should buy or sell.
Companies are
leaner and meaner. It wasn't all bad news…
- Many
write-downs and impairment charges were one-time adjustments.
Write-downs today can mean less depreciation expense tomorrow, which can
add leverage to the upside when gold rises.
- Most
(though not all) companies have been able to reduce costs substantially.
- A
good number of companies are still increasing production, which we
expect to translate into much higher share prices as gold rises.
The market clearly
expects margins and bottom lines to materially improve due to the positive
changes most management teams have been able to make.
Sentiment has
shifted. A
number of analysts have started to take notice of the deep valuations gold
stocks offer. There's a sense among an increasing number of investors that
the worst is over in the gold sector, and therefore that bargains had best be
snapped up while they're still available.
The broader stock
market is weak. There's an inverse relationship between gold and the S&P; more
often than not, when one is weak, the other tends to be strong—and Wall
Street has been weak.
Gold is rising. With each tick up in the gold
price, producers become more attractive. Most investors know you can get
leverage to the gold price through a gold stock, as has just been amply
demonstrated in the last few weeks.
That said, gold stocks
have been rising sharply since their December 31 lows—some charts have gone
almost vertical—so don't be surprised if we see a pullback soon. But a larger
shift in the gold market is under way; we're moving from a two-plus-year bear
market to the beginnings of a new bull market—and that's when we stand to
make the most money.
As Doug Casey said in our
recent Upturn
Millionaires video event: "You have to look at the bright side of this
resource market, and that is that it's the most volatile class of stocks in
the world. When they become overpriced, they become extremely overpriced, and
when the market bottoms, they become unbelievable values. And that's where we
are right now."
Jeff Clark
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