July 6, 2022

Have Gold Stocks Hit Bottom Yet? Richmont Mines Latest Disappointment

The price of gold is almost exactly unchanged on the year.  The first trading day of the year saw gold close at $1598 per ounce.  After reaching a high of $1781 on February 28th, gold has drifted lower and at today’s closing price of $1604 gold is up a fraction of a percent on the year.

 

The story has been quite different for stockholders in gold mining companies.   Gold stocks have gone through a brutal sell off during 2012 despite the neutral price action of gold bullion.  Stock prices of the junior gold miners have been particularly brutalized as shown by the Market Vectors Junior Gold Mine ETF (GDXJ) which is down over 50% from its high late last year.

 

GDXJ - Courtesy stockcharts.com

The shares of the largest gold miners have also seen major losses during 2012.  The PHLX Gold and Silver Index (^XAU), comprised of 16 major gold and silver producers, has decline by 21% from its peak reached in early February.

 

XAU - courtesy stockcharts.com

The latest casualty in the junior gold mining sector was Richmond Mines (RIC) which recently lowered its estimate of reserves and production and took a major write down on assets.  Richmond, a highly regarded gold mining company with excellent reserves and earnings prospects, was only one of the latest blowups in the junior gold mining sector.  Richmond Mines has collapsed 70% from its $13 per share price in late January, closing today at $3.97.

 

Courtesy stockcharts.com

Is the decline in gold mining shares a harbinger for the future trend in gold bullion or is the latest sell off a major buying opportunity?

Here are some thoughts from two of the brightest minds in the industry who both have superb long term track records.

Legendary gold investor John Hathaway of the Tocqueville Gold Fund (TGLDX) remains bullish as discussed in his latest Gold Strategy Investment Letter.

Why would anyone own them other than for the possibility of a higher gold price?  While we do not wish to minimize such issues as capital spending cost pressures, resource nationalism, or competition from GLD and similar instruments, we believe those concerns will fall by the wayside with the resumption of the bull market in the metal.  If gold were to trade at $2,000/oz. later this year, and should the ratio of gold mining shares (XAU basis) return to the mid -point of its range since the launch of GLD in 2004, or roughly 15% versus the current level roughly 10%, mining stocks could  double on a 25% increase in the gold price.

The policy challenges facing the Volcker Fed and the Reagan administration that ultimately capped the previous bull market in gold seem mild by comparison to those of today.  We believe that gold remains under owned and misunderstood notwithstanding a thirteen year bull market.  It is considered a fringe strategy to most, a little bit exotic and slightly risqué to the mainstream investor.  While policy makers attempt to buy time by inventing solutions that are incomprehensible to most, the dream of mainstream investors for robust growth amidst stable economic conditions remains alive.  Faith in half-baked policy improvisations that are nothing more than repackaging bad debt in the envelope of sovereign credit, along with hope that ever increasing quantities of sovereign debt will generate growth is, in our opinion, delusional.

Peter Grandich gives an excellent in-depth analysis on both gold stocks and gold bullion in a recent post on the Grandich Letter website.  The full post is a must read – here are some of his latest thoughts.

Despite general metals prices much, much higher than a decade or two ago, the mining and exploration industry is far more challenged now than ever before. This is especially true as you move further down the food chain in the junior resource sector.

I’m certain there are other reasons, but I believe the above is a good part of why we’re where we are today. The question now is does this mean the mining and exploration stocks are no longer worthy?

The “mother” of all bull markets continues thanks to four key reasons:

  • Once dominant sellers that capped any advances, Central Banks are now net buyers.
  • Gold producers, who once “cut their noses to spite their faces” by selling forward large quantities of future production and helped capped the price by doing so, now operate under the belief hedging is a “four-letter” word among investors.
  • Gold Exchange Traded Funds (ETFs) greatly changed the balance between supply and demand. Investors who never or rarely sought exposure to gold beforehand (because of difficulties associated with physical bullion buying) and/or who ended using mining shares for exposure only to see them not come close to correlating movements in the gold price themselves, embraced ETFs in a big and powerful way in order to have exposure to gold. Whether or not those ETFs are really direct ways to physical ownership doesn’t concern them, but their large-scale appetite for them combined with the changes among Central Banks and gold producers greatly altered the supply versus demand in favor of demand.
  • Gold is money. There’s no Central Bank printing it like it’s going out of style. There’s no government(s) borrowed up to their eyeballs in it. Where you find real growing wealth in the world you find those people acquiring it are using gold as a storer of their wealth.

Gold Stocks Remain Frozen In Time

Investors in gold mining stocks have had a tough five years.  Since 2008, the price of most gold stocks have remained frozen in time even as gold bullion has doubled in price.  Is the disparity in price performance between gold stocks and gold bullion a bullish set up or another false dawn for gold stock investors?

Gold - courtesy kitco.com

The PHLX Gold and Silver Index (XAU), which is comprised of 16 major gold and silver producers, is no higher than it was during the last quarter of 2007.   The large cap gold stocks represented by the Market Vectors Gold Miners ETF (GDX) have shared the same fate with no gain for the past five years.

GDX - courtesy yahoo.com

Beginning in 2011, the divergence between the price of gold bullion and gold stocks has widened even further.  Comparing the SPDR Gold Trust (GLD) to the PHLX Gold and Silver Index, we see that gold has dramatically outperformed gold stocks by a factor of five since early 2007.

XAU vs GLD - courtesy bigcharts.com

At this point, gold stocks are incredibly oversold and, in addition, represent sound fundamental value based on the price of gold bullion.  Given the notorious volatility of gold stocks, a move by gold above its high of last year could be the spark that ignites a huge rally in the gold stocks.

John Hathaway of the Tocqueville Gold Fund (TGLDX), who has produced fabulous investment returns over the past decade, had this to say in his latest Investment Update.

Gold and gold stocks appear to be bottoming in the wake of a four month correction which began in mid -August when the metal peaked at $1900/oz. Bearish sentiment is at extremes not seen in many years. This and a number of other indicators, such as stocks that have been hit by negative sentiment, the downtrend in gold prices since August, and tax loss selling, support our view that a rally lies ahead. This very bullish market set-up, in our opinion, mirrors the extraordinary investment opportunity of the despondent year end in 2007. Even though gold prices have been declining for several months, they finished the year with substantial gains. This suggests that the value represented by gold mining equities held in our portfolio could be extraordinary.

Disarray in Europe is, in our opinion, a slow motion version of the global market meltdown in 2007. It appears to us that the U.S. Fed is once again acting as the lender of last resort to European central banks in their efforts to save the euro. As in 2007, U.S. sovereign credit will be substituted for failing credits, in this case, peripheral European states. The fig leaf to justify such action on the Fed’s part is sado-fiscalism, or extreme austerity packages administered by technocrats. Tough restraints on profligate public spending, which has become a way of life in all Western democracies, will not go down easily. These measures are deflationary and will be ultimately met by howls of protests from mobs demanding renewed money printing and deficit spending. In our opinion, the fundamentals for gold are stronger than ever because the outlook for paper currencies is dire. The difficult correction of the last four months has shaken out all but the strongest holders, a perfect set-up for advances to new all-time highs in 2012.

Over the past ten years the Tocqueville Gold Fund has had an average annual return of 24%, far exceeding the 3% return by the S&P500.   The top ten holdings and percent of total assets of the Tocqueville Fund are listed below.

TGLDX Holdings

Lowering Gold Stock Portfolio Risk Through Diversification

There are numerous investment strategies available to capitalize on the gold bull market.  Gold investors have the option of investing in gold bullion, gold coins, gold ETFs, gold mutual funds and individual gold mining stocks.

Although many gold investors prefer to exclusively hold physical gold, diversifying into selected gold stocks can dramatically increase total returns.  Although gold stocks as a group have recently underperformed bullion, selected gold stocks have outperformed gold bullion.

Well managed gold mining companies with large ore reserves and increasing mine production have provided investment returns far in excess of the gain in gold bullion as seen below with the examples of Randgold Resources (GOLD) and Gold Resource Corp (GORO).  Both of these gold mining companies have vastly outperformed gold bullion when compared to the SPDR Gold Trust (GLD) which tracks the price of gold bullion.

GORO, GOLD vs GLD - Courtesy yahoo.com

Selecting the gold stock that will outperform bullion is difficult, however, as seen by the lagging performance of the PHLX Gold/Silver Sector (XAU) when compared to the GLD.  The XAU Gold/Silver Sector is a broad based index of sixteen large precious metal mining companies.  The GLD has outperformed the XAU by three times since 2009.

GLD vs XAU - courtesy yahoo.com

 

As with any stock portfolio, diversification is required into order to avoid the risk of under performance.  An example of the risk of holding a gold portfolio with only a small number of stocks was seen today when the price of Nevsun Resources (NSU) collapsed by almost 31% after the company unexpectedly announced that gold production will plunge by nearly half in 2012 due to a reduction in estimated gold reserves.

Since selecting individual gold stocks can be a daunting task for investors, a better alternative would be to invest in an actively managed gold stock mutual fund with a proven record of superior investment returns.  Past performance has shown that an actively managed gold stock mutual fund has outperformed passively managed gold index funds.

One gold fund that should top the list for investors to consider is the Tocqueville Gold Fund (TGLDX), run by legendary gold investor John Hathaway.  The Tocqueville Gold Fund has a remarkable average annual return over the past ten years of 23.3%, almost double the gain in the Philadelphia Gold/Silver Index.

courtesy yahoo.com

Although gold bullion has outperformed gold stocks since 2008, Mr. Hathaway’s outlook for gold remains extremely bullish and he expects that as gold continues to increase in price, gold stocks should once again outperform the returns of gold bullion.  In his latest Investment Update, here is what Mr. Hathaway had to say.

Gold and gold stocks appear to be bottoming in the wake of a four month correction which began in mid -August when the metal peaked at $1900/oz. Bearish sentiment is at extremes not seen in many years. This and a number of other indicators, such as stocks that have been hit by negative sentiment, the downtrend in gold prices since August, and tax loss selling, support our view that a rally lies ahead. This very bullish market set-up, in our opinion, mirrors the extraordinary investment opportunity of the despondent year end in 2007. Even though gold prices have been declining for several months, they finished the year with substantial gains. This suggests that the value represented by gold mining equities held in our portfolio could be extraordinary.

Disarray in Europe is, in our opinion, a slow motion version of the global market meltdown in 2007. It appears to us that the U.S. Fed is once again acting as the lender of last resort to European central banks in their efforts to save the euro. As in 2007, U.S. sovereign credit will be substituted for failing credits, in this case, peripheral European states. The fig leaf to justify such action on the Fed’s part is sado-fiscalism, or extreme austerity packages administered by technocrats. Tough restraints on profligate public spending, which has become a way of life in all Western democracies, will not go down easily. These measures are deflationary and will be ultimately met by howls of protests from mobs demanding renewed money printing and deficit spending. In our opinion, the fundamentals for gold are stronger than ever because the outlook for paper currencies is dire. The difficult correction of the last four months has shaken out all but the strongest holders, a perfect set-up for advances to new all-time highs in 2012.

Gold Stocks Vastly Outperform Gold On The Week – Will The Trend Continue?

For the week ending October 14, gold continued to rally, gaining $26 on the week to $1,678.00 as measured by the closing London PM Fix Price.

Gold stocks, by comparison,  dramatically outperformed the gain in bullion by almost fourfold.  In order to get a broad based assessment of relative performance, gold was compared to the XAU, GDXJ and TGLDX.

The XAU or Philadelphia Gold/Silver Sector is a broad based index of sixteen large precious metal mining companies, the GDXJ or Market Vectors Junior Gold Miners tracks small and medium cap gold and silver miners and the TGLDX  or Tocqueville Gold Fund is a diversified gold stock fund with one of the best track records in the industry.

A summary of gold compared to the XAU, GDXJ and TGLDX for the one week period ending October 14th is shown below.

WEEK ENDING OCT 14, 2011
% GAIN OR (LOSS)
GOLD 1.57%
XAU 5.51%
GDXJ 6.85%
TGLDX 5.68%

One week does not ensure that a trend will continue but the gold stocks have long been under priced in relationship to gold bullion. Eventually, this pricing disparity will converge. Throughout 2011, gold stocks underperformed gold as can be seen by comparing the performance of gold to the XAU.

 

XAU VS GOLD - courtesy stockcharts.com

The Tocqueville Gold Fund (TGLDX), run by legendary gold investor John Hathaway, has vastly outperformed the S&P, the XAU and gold bullion over the past decade with an average annual return of over 26%.  This is what John Hathaway had to say about the long term performance of gold stocks in his first half investment update for the Gold Fund.

During the 1st half of 2011, gold shares lagged the gold price. Bullion rose 5.56% while the XAU benchmark declined 10.57%. The Tocqueville Gold Fund declined 5.53%. This apparent disconnect is not unprecedented. For example, during the credit crisis of 2008, the XAU declined 28.54% while the price of gold rose 5.77%. Even though the gold price is the single most important fundamental determining value for gold mining shares, they often do not move in lockstep and the first half of 2011 is one such example. In 2010, gold shares performed particularly well and the XAU rose 34.67% while the metal rose 29.52%. In our opinion, the relative underperformance of gold shares during the first six months of this year represented a healthy and necessary consolidation. The Tocqueville Gold Fund owns physical bullion but is much more heavily weighted to gold mining stocks, as has been the case over the past ten years.
We believe that there is significant performance catch up potential ahead for gold mining shares relative to bullion. Earnings reports for the quarter just completed should be exceptionally strong for all producers and in most cases surpass all- time records. We expect such results to be accompanied by numerous announcements of dividend hikes. Should gold prices maintain or exceed the $1500 level, skeptical investors will become more willing to normalize the earnings power that is soon to be demonstrated.
The factors that drive liquid assets into gold bullion continue to flourish. Most important, negative real interest rates open the floodgates for capital to seek out the safety of gold. In addition, the never ending sagas of the Eurozone debt woes and the US debt ceiling remind investors that sovereign debt of nearly all Western democracies are not the safe havens they were once regarded. Nevertheless, while we expect bullion prices to set new highs during the second half, we believe gold mining shares will provide returns superior to the metal.

The latest report on the top ten holdings of the Tocqueville Gold Fund are shown below.

 

 

Gold Stocks Are Positioned For An Explosive Move Up

Historically, gold stocks have outperformed gold bullion.  Mining companies typically benefit from leveraged earning gains as gold prices rise and production costs remain stable.  Higher gross profits on each ounce of gold produced flow right to the bottom line, boasting profits and stock prices.

During the initial phase of the gold bull market, investors reaped greater profits by owning a basket of gold mining stocks as opposed to holding gold bullion.

Using the PHLX Gold/Silver Index (XAU) as a proxy for mining stocks, the XAU significantly out performed gold bullion during the initial stages of the gold bull market from 2000 through 2008.  From 43.87 in October 2000, the XAU advanced to 195.25 in June 2008 for a gain of 345%.  During that same period of time, gold rose from $264 in October 2000 to $930 in June of 2008 for a gain of 252%.

XAU GOLD/SLVER INDEX - COURTESY YAHOO FINANCE

Since 2008, however, the price correlation of gold mining stocks to gold bullion has reversed.  Despite a doubling in the price of gold since 2008, the XAU is only marginally higher at 210.93 for a very paltry gain of 8%.  An investor who was super bullish on gold since 2008 would have gained virtually nothing in mining stocks while the price of gold soared.

Investors in broadly diversified precious metal mutual funds had equally poor results.  As of June 2011, both the Vanguard and Fidelity gold mutual funds have drastically under performing gold bullion since 2008.  The Vanguard Precious Metals Fund (VGPMX) actually delivered a horrendous three year return of minus 0.46% as the price of gold soared 80%.  The only investors in gold mining stocks since 2008 who made profits were those astute enough to pick the handful of mining stocks that out performed gold bullion.

Even the Tocqueville Gold Fund (TGLDX), run by legendary gold investor John Hathaway, has been unable to outperform gold bullion since 2008.

 

XAU, GLD, TGLDX - COURTESY YAHOO FINANCE

Some of the reasons for the disconnect between gold mining companies and gold bullion since 2008 include the following.

  • Investors learned the downside risks of leverage during 2008 when gold stocks got absolutely crushed while the price of gold bullion had a relatively modest decline.  As measured by the XAU, gold stocks declined by a devastating 65.7% during 2008 while gold bullion declined by only 29% from a peak of $1,011 to a low of $713.
  • A growing preference for holding physical gold and silver.
  • The realization by investors that it takes an in-depth technical knowledge of the mining industry as well as the ability to analyze financial statements to be able to pick the gold mining stock that will outperform gold bullion.
  • Gold mining companies can go bankrupt while gold bullion is eternal and will always retain a value and constitute a store of wealth.  Long time gold investors may remember stocks like Echo Bay Mines, Royal Oak Mines and many others which became worthless.
  • The introduction of gold ETFs such as the SPDR gold shares (GLD) created competition for gold mining stocks.  Before gold ETFs were established, investors who wanted exposure to the gold market without having to hold physical bullion would have had to invest in gold mining shares.  The GLD recently became the largest ETF by value with holdings of over $70 billion in gold bullion.

Investor preference for gold bullion and gold ETFs over mining stocks has created a vast pricing disparity between gold bullion and gold stocks.  High quality major gold producers with vast proven reserves of gold are now on the bargain table.  Gold stocks are selling at almost all time lows compared to gold bullion.   Two bargain gold mining stocks previously featured in goldandsilverblog.com are Newmont Mining (NEM) and Kinross Gold (KGC).  Investors in Kinross Gold, for example, are effectively buying gold at around $300 per ounce.

Markets can price stocks far below fundamental values, sometimes for an extended period of time, but ultimately the underlying value will be reasserted.  Gold mining stocks at this time represent immense value and are being steeply discounted.

What will be the trigger for an explosive move up in quality gold mining stocks?  Consider Glencore’s recent bids for nickel, coal and copper miners as reported in ft.com.

Glencore on Wednesday launched a A$268m (US$280m) bid to acquire full control of Minara Resources, an Australia-based nickel miner in which it already has a 73 per cent stake. Last month it offered $475m (£295m) to acquire one of Peru’s largest copper prospects, the Mina Justa project.

Industry executives said that Glencore’s latest target was Optimum, South Africa’s fourth largest coal exporter. The trading house is close to launching a bid for the Johannesburg-listed miner with the support of several South African partners, executives said.

Gold mining stocks have become  irresistible take over targets.  The first takeover bid for a gold mining company will trigger a buying stampede which could rapidly result in a doubling of gold stock prices from currently depressed levels.

Insights From One Of The World’s Lengendary Gold Experts

The Standard & Poors 500 stock index is still below the level it reached more than 10 years ago in early 2000.  Interest rates on traditional bank savings have barely exceeded zero percent since the Fed instituted its zero interest rate policies in 2008.  Meanwhile, incomes are stagnant and the cost of items we use everyday have been inexorably increasing.

Investors who expected to achieve financial independence by investing in actively managed stock mutual funds have seen their dreams turn to nightmares.  The brutal truth is that the vast majority of mutual fund managers do not beat the market over the long run.   Investors who did not diversity out of traditional investments have seen the value of their savings diminished by inflation and stagnant stock prices.

By contrast, one legendary gold investor who has consistently made great calls in the precious metals markets has achieved average annual returns over the past ten years of over 29%.  Money doubles in about 2.5 years at 29%.  Investors who had the patience and conviction to ride out inevitable corrections have seen fabulous returns.

The man who achieved this stunningly successful investment record is Harvard educated John Hathaway, who has been with the Tocqueville Gold Fund (TGLDX) since its inception in 1998.  Hathaway’s success has been based on his ability to chose smaller mining companies that have the potential for explosive growth and then patiently wait for results.  The average gold mutual fund has an annual holdings turnover of 104% compared to 9% at TGLDX.  While other fund managers frenetically trade mining stocks, Hathaway’s deep knowledge of the companies he invests in has resulted in superior investment returns.  Also benefiting shareholders is the fact that the TGLDX does not charge  front end or deferred sales loads which reduce investor returns.

The TGLDX has soundly beaten the investment performance of both gold bullion and the widely followed PHLX Gold/Silver Sector (XAU) which holds a broad basket of gold and silver stocks.  Since 2000, the TGLDX has returned approximately 810% compared to 500% for gold bullion and 325% for the XAU.

TGLDX VS XAU - COURTESY YAHOO FINANCE

When John Hathaway speaks, serious gold and silver investors pay attention.  In the Tocqueville Gold First Quarter 2011 Observations, Mr. Hathaway explained why he remains positioned for further gains in the precious metals and related equities.

Mr. Hathaway noted that his current position on gold is based on interrelated macro economic issues which make the “current landscape especially tricky”.   Hathaway noted that “the Fed seems predisposed to maintain extremely lax monetary conditions” and that “a credible fiscal plan seems like a long shot”.   Conditions in the Middle East could worsen considerably, energy prices are likely to remain at levels that seemed “unthinkable” a year ago and if there is political resistance to the Fed reducing its balance sheet, “the conditions are ripe for an inflationary spiral”.

The dollar appears to be deeply oversold and a near term rally could slow gold’s uptrend, according to Hathaway.

Mr. Hathaway feels that by mid year, the outlook will be more clear but in the meantime, “we remain positioned for further advances in precious metals”.

The top 8 stock holdings of TGLDX at March 31, 2011 were Goldcorp (GG), Newmont Mining (NEM), IAMGold (IAG), Ivanhoe (IVN),  Silver Wheaton (SLW), Gold Resource Corp (GORO), Osisko Mining (OSK) and Randgold Resources (GOLD).

Are Gold Stocks Really Underforming Gold Bullion?

Depending on which gold stock investor you talk to, gold stocks have either been under performing or outperforming gold bullion.

Theoretically, given the earnings leverage associated with gold miners, a big move up in gold bullion should translate into handsome gains for shareholders of gold mining companies as earnings per share increase.  In the real world, however, the cost of exploration and development, mine depletion and the energy intensive process of gold mining and refining can result in costs that exceed the increased revenue from higher gold prices.  Gold mining companies with operations in less developed countries with weak property rights can also wake up one morning and discover that the government has expropriated their mines.

So which is it?  Would it have been better to own gold stocks or simply buy a gold ETF or take physical possession of gold bullion?  Like many things in life, it all depends, and the result reinforces the argument to maintain a well diversified portfolio.

Gold miners that have been able to translate higher gold prices into higher profits have done very well while other gold miners with poor results have significantly lagged the gains seen in gold bullion.   The results have been company specific.  A gold stock investor who was correct in predicting higher gold prices but picked the “wrong” gold stocks fared poorly.

Here’s a sample of the relative performance of some of the largest gold miners compared to the price of gold, using the SPDR Gold Trust (GLD) as a proxy for bullion prices.  Two major gold miners, Newmont Mining Corporation (NEM) and Kinross gold Corporation (KGC), dramatically under performed the GLD, while Goldcorp (GG) tracked the GLD performance.  If you were lucky enough to own Randgold Resources (GOLD), your profits would have been twice the gains on the GLD.

RELATIVE PERFORMANCE STOCKS VS GLD - COURTESY YAHOO FINANCE

The bottom line is that unless an investor has considerable expertise in assessing the gold mining industry and specific company prospects, the better choice was to go with a gold ETF or stash gold bullion in a safe deposit box.  If the biggest gains in gold prices are yet to come, as I believe, an investor with a 100% allocation to individual gold stocks should consider reassessing his portfolio allocation.

The last option that should be mentioned for those seeking higher returns from the leverage of owning gold stocks instead of a gold ETF, would be to invest in a gold mutual fund with a solid track record of investment success.

Tocqueville Gold Fund Performance vs. GLD

The Tocqueville Gold Fund(TGLDX) is a highly regarded mutual fund with solid portfolio managers who have had a very successful track record in picking the right gold stocks.  Over the past two years, the TGLDX has outperformed the GLD and with far less volatility.