“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Friday, December 7, 2012

Mining Shares Eroding further Against Gold

When I normally lay out a chart detailing the ratio of the mining shares to the price of an ounce of gold, I use the HUI. I will still put up one of those further below but wanted to show you a ratio chart using the XAU to illustrate just how cheap these mining shares have become relative to gold itself.




The chart is simply staggering. I have gone back as far as my data will allow me with this and cannot find a reading so low.

I cannot overemphasize how critical it is that the CEO's of these mining companies listen to the message of the market and make the necessary changes to their organizations.

The two biggest things I can read in this message is to:

1.) Get a handle on expenses and cut them
2.) this follows on #1 - return those savings to the shareholders in the form of higher dividends.

Do this, and investors will react positively. Why? Where else can you buy so much gold at such a discounted price to the current market value? Relative to gold, some of these shares are as cheap as they have ever been, period.

Checking in with the HUI, some of the shares that comprise that index are as cheap, relative to gold itself, as they have been in ELEVEN years.





7 comments:

  1. Dan,

    Why do you think gold mining managements have failed for so long to do anything substantial to help their companies manage costs and not destroy shareholder value? Pure incompetence or is there really nothing else they can do? Looks more and more like the former in my opinion. They get paid millions and bonuses while making very poor decisions all around, with no one holding them accountable it seems.

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    Replies
    1. Unknown;

      I find it hard to believe that there is nothing else that they can do meaning some of them still do not understand what the market is telling them to do.

      Those who are wasting money on fruitless projects need to find a way to trim those expenses or drop the projects altogether if they continue to drain the company without any appreciable return on investment. Shareholders are losing patience with the management and are making their displeasure felt.

      I cannot tell you how many personal emails I have received from guys who have held these shares for many years now and were strong hands who have had enough. There is too much opportunity cost in holding shares that are not going anywhere.

      The thing is that the shares are now so cheap relative to bullion itself that if these CEO's began giving some signals that they understand the message of the market, we would see a tsunami of money come back into the shares as a result. Where else can you buy gold at such a discounted price??? it is a bargain but not a bargain until the message of the market is heeded.

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  2. How much of this is selling and how much if it is shorting? I think there is a lot of shorting in the miners causing longs to sell.

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  3. TheGilliom, I also wonder about shorting too. Certainly over the past several years it might be argued that precious metals mining management has not allowed share price to leverage the price of gold, however, the larger than usual volatility over the past year, and over an index of funds such as the XAU/HUI/GDM/GDX, would seem to indicate that share price movements are more speculative in nature, rather than being based upon investment fundamentals.

    ReplyDelete
  4. I sent Jim Sinclair an email asking his opinion about the miners and he was very clear....hedge funds shorting.

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  5. I agree CAE. Dan said it best, take delivery all. ETF's are leveraged and if they cannot deliver...boom. Miners are leveraged but only to he extent Big Banks and/or venture capitalist allow them, which is much different than those that make the rules (Govt and Big Banks) with ETF's. Look at GLD vs Gold vs ^Hui vs ^xau. After Oct 2011 in full election and lobbying style big bank money either in ETF's and/or thru their agents (JPM, C, BOA, GS, etc) drove institutational investments into GLD. The hedgies completed the job. If Jim is right the Miners will explode.

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    ReplyDelete

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