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Gold Stocks – Where is the Bull Market?

Commodities / Gold & Silver Stocks Sep 17, 2010 - 04:01 AM GMT

By: David_Urban

Commodities

Gold bullion has been on a strong and steady march since its bottom in late 2008 but Gold stocks have remained mired in a sideways movement as investors become impatient waiting for the sun to shine upon them. But to understand why Gold stocks are moving sideways investors first need to have a brief history lesson about the industry.


For the 80′s and 90′s Gold was looked at with disdain after Paul Volcker broke the back of inflation and equities started their great bull market. With the Gold price trading in a tight range close to the production price Gold producers were forced to hedge against price declines. With profit margins tight, hedging was the smart strategy as it gave downside protection to the mining companies. Exploration projects were difficult to fund and companies instead focused on increasing production and efficiency at current mines.

When the Gold bull market started gold producers continued to be wary of the runup in price after spending almost 2 decades in a zero profit margin environment.

In the early part of the 2000 decade new investors looked to mothballed projects drilled out in the 70′s and 80′s which were shelved because they were uneconomic at the current prices. Savvy investors purchased many of these projects and looked over the drill results with new technology, often leading to major new discoveries.

Technological advancements also led to new discoveries at existing mines and greenfield areas. Exploration companies popped up overnight and a global Gold rush began as investors scoured the globe looking for major projects in South America, Canada, the Caribbean, and Africa.

New producers realized that having only one mine with a 10 to 20 year lifespan puts an end date on the company if additional projects are not discovered/purchased. This pushed the new producers to use the rising Gold price as an opportunity to acquire assets and build up the inventory to increase the life span of the company.

More importantly, it allowed the new producers to continue to move up the curve from being an exploration company to a development company then to a small and mid-tier producer and finally a major producer.

This in turn led to companies like Goldcorp growing into major Gold producers since before companies like Barrick Gold and Newmont Mining dominated the landscape.

The new producers have become even more aggressive than their old guard counterparts acquiring bolt on projects similar to Goldcorp’s activities at Red Lake to increase the assets and existing life of a project.

In most cases stock is used as currency to acquire the new projects diluting current shareholders but offering long-term value as a more ounces in the ground extends the life of the company.

This has caused stock prices of most companies to trade sideways while the price of Gold bullion rises disappointing investors. But hope is on the way, as the remaining major exploration and development projects are acquired Gold producers, new and old, will have to turn inward for growth. This means corporate efficiency and a decrease in development expenses which will translate into a jump in profits and stock prices.

By David Urban

http://dcurb.wordpress.com/

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PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. 

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David Urban Archive

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