Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Only Thing Systematic Is The Destruction Of America - 29th Sep 20
Fractional-Reserve Banking Is The Elephant In The Room - 29th Sep 20
Gold And Silver Follow Up & Future Predictions For 2020 & 2021 – Part I - 29th Sep 20
Stock Market Short-term Reversal - 29th Sep 20
How Trump co-opted the religious right and stacked the courts with conservatives - 29th Sep 20
Which RTX 3080 GPU to BUY and AVOID! Nvidia, Asus, MSI , Palit, Gigabyte, Zotac, MLCC vs POSCAPS - 29th Sep 20
Gold, Silver & HUI Stocks Big Pictures - 28th Sep 20
It’s Time to Dump Argentina’s Peso - 28th Sep 20
Gold Stocks Seasonal Plunge - 28th Sep 20
Why Did Precious Metals Get Clobbered Last Week? - 28th Sep 20
Is The Stock Market Dow Transportation Index Setting up a Topping Pattern? - 28th Sep 20
Gold Price Setting Up Just Like Before COVID-19 Breakdown – Get Ready! - 27th Sep 20
UK Coronavirus 2nd Wave SuperMarkets Panic Buying 2.0 Toilet Paper , Hand Sanitisers, Wipes... - 27th Sep 20
Gold, Dollar and Rates: A Correlated Story - 27th Sep 20
WARNING RTX 3080 AIB FLAWED Card's, Cheap Capacitor Arrays Prone to Failing Under Load! - 27th Sep 20
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelerting Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

How Cheap are Gold Mining Stocks Now?

Commodities / Gold and Silver Stocks 2015 Aug 19, 2015 - 12:45 PM GMT

By: David_Morgan

Commodities

Are Gold Stocks Cheaper Than They Were in 2008?

Chris Marchese, Senior Equity Analyst : The short and simple answer to this question is yes! Some will say--that is just my opinion. I could show you numerous equations proving the gold stocks were cheaper in 2008 than today and vice versa using similar metrics.


Over the past 4-to-6 weeks there have been countless articles arguing one way or other, however each one I’ve read suffers from one serious flaw, not one has even mentioned how the value of an asset is determined. The value of any asset is the present value of the (free) cash flows generated over the life of an asset.

This doesn’t mean a discounted cash flow model has to be used or even a net asset value calculation which can be accurate if any only if the assumptions or inputs which go into the model are accurate. A valid valuation model must take the time value of money into account. Furthermore, what matters isn’t the current price of the underlying commodity but the near, the intermediate and long term prices.

In this case, the underlying fundamentals for gold and silver are significantly better than they were in 2008. I will discuss why I hold that view but it is far more important to acknowledge why all these articles fail to make a convincing argument.

How the value of an asset is determined goes unacknowledged, in other words, the writers of most (not all) don’t fully comprehend the argument they were making. Even if they had said something like “the price of gold will go to $1,500/oz. in the future”, it would take the time element into account, at least to some degree but this is a rather vague explanation. The reason why Austrian Economics provides a very sound explanation of the modern day business cycle and economics in general is because time is taken into account.

All other “schools” of economic thought such as the Keynesians, Neo-Cons, and Monetarists etc. are flawed for countless reasons including the exclusion of time from human action, in other words they assume economic activity takes places in a vacuum. An example of this is using a ratio calculated by taking a mining stock index, ETF or the like such as the XAU, HUI, GDX. This would be a very useful metric IF we lived in a static world but our circumstance is quite the opposite, being we live in an extremely dynamic world. That being said, using a metric of the XAU/Gold Price or a variant thereof is absurd.

Another article I read attempted to argue that gold miners were making a lot of money as measured by a fairly recent industry wide adoption of reporting costs via “AISC (All in Sustaining Costs)” to replace “Cash Costs”, but this article failed to prove the thesis.  The first assumption implicitly states that by taking the average realized gold price less AISC, it results in free cash flow or operating cash flow, the true measure of profitability. If you invest in the mining sector, you know that net income is only a starting point when calculating profitability and that operating performance is seen through operating/free cash flow and true profitability or that which is above and beyond what is needed to reinvest in new and existing operations and can (not necessarily is) paid out as dividends to shareholders is Free Cash Flow.

AISC does provide us with information about the operating performance over a period of time but does NOT say anything about the future. While AISC is a vast improvement over cash costs, it has its shortcomings. The first is that it excludes taxes, which is unavoidable and in reality is a cost arising from operations because the determination a company’s income tax liability is largely a function of how efficient or inefficient operations are as well as the price of gold and accounting or the accounting strategy employed, particularly with deferring income taxes, paying off a previous deferred tax liability etc.

The second is that it doesn’t take into account such things as changes in non-cash working capital. In other words, the average realized gold price less AISC does not measure operating cash flow, let alone free cash flow. Lastly Greenfield exploration and other re-occurring non-operating expenses, which are cash outflows and therefore reduce free cash flow are excluded from the fore mention missive.   

Why Gold (and Silver) are far more attractive today relative to 2008

All major governments around the world (inclusive of central banks because they are not independent) have pumped remarkable amounts of fiat “money”  into the system which despite the relentless arguments of deflation that have been on-going since 2009, has resulted is very substantial monetary inflation.

Let us note that using the classical definition of inflation is an increase in the supply of money and credit with rising consumer and producer goods being a symptom. There was a short period of credit contraction in 2008-2009, but with all the bailouts and currency injected into the system combined with QE1 made this short lived. At the 2014 Silver Summit, during a panel discussion I polled the audience asking everyone to raise their hand if they thought their average cost of living has increased 5% or more annually since 2008. Nearly all those willing to participate raised their hands. The question was at least 5.00%, so if you asked each individual to guess the average annual increase it might actually be higher than 5.00%.

Many precious metals investors think inflation is what will drive gold and silver prices in the future, but 10% inflation doesn’t compare to the ticking debt bomb that will bring down the global fiat money empire. This is not to say that hyperinflation will become a worldwide issue although it may result in some places in the world. Let me state it there will be monetary resets throughout the currency markets. This means, like all other times monetary resets have occurred, a very substantial devaluation of the currency. Reckless monetary policy, while destructive has not compared to the fiscal recklessness, which has caused gross federal debt + state debt + municipal debt + household debt + corporate debt (Non-Financial) + corporate debt (financial institution debt) = (total debt) to become unmanageable.

Today, in Japan total debt/GDP is well over 500%, debt/GDP in the U.S. is over 300% and the same goes for most every country in western world. If you look back throughout history the earmarking of every currency crisis is a debt laden economy. The point is that you can’t compare the price of gold stocks today vs. 2008. Things have changed, the world is dynamic and forecasting the future based on static metrics is simply invalid.  It is analogous to comparing an apple on one’s head to the accelerating arrow coming at it from an archer.

Chris Marchese writes for The Morgan Report, consults, and worked as a financial analyst for a major brokerage firm. He is co-author of The Silver Manifesto and participates at all levels in equity analysis including site visits. Learn more about TMR -- The Morgan Report here: http://www.silver-investor.com/aboutus.html

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

David Morgan Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules