Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold Miners Making More Money?

Commodities / Gold & Silver Stocks Nov 30, 2009 - 01:23 PM GMT

By: Adam_Brochert

Commodities

Best Financial Markets Analysis ArticleMining is a tough business and profits are rarely easy to come by. I learned the concept of the "real" price of Gold from Bob Hoye at Institutional Advisors. This concept ignores the nominal price of Gold (i.e. ignores the currency effect, which is difficult for paperbugs but easy for long term Gold bulls) and focuses on the price of Gold relative to the price of other commodities as a ratio. Mr. Hoye has his own proprietary index, but as we all stand on the shoulders of giants before us, I use my own proxy of this ratio by dividing the Gold price by other commodities indices (I typically use the Continuous Commodities Index [$CCI]).


When the ratio of the Gold price divided by a basket of commodities is rising, the "real" price is rising. This is irrespective of the nominal price. In other words, the price of Gold in U.S. Dollars could be falling while the "real" price is rising. The concept is a valid and important concept for two reasons.

First, wealth is relative. If Gold goes to $2000/oz but oil goes to $10,000 per barrel, then Gold investors are poorer if they need to use energy/in energy terms. Deflation in Gold terms has been here for a decade - it is only when paper currency is introduced into the equation that things get confusing. Let's say Gold starts today at around $1175/oz and a house in your neighborhood costs $200,000 today. In a year, if Gold falls to $800/oz (not saying it will) and the house in your neighborhood costs $100,000 at that time are you richer or poorer? Well, both! In nominal terms, you are poorer. In other words, if your main goal in life is to accumulate as many pieces of paper issued by the unconstitutional, non-federal, for-profit federal reserve corporation, you are poorer. However, if your main goal is to buy a house some day, you are wealthier in this scenario.

As a strong believer in Gold during the Kondratieff Winter cycle that we have entered (it ain't over yet, trust me), I believe paper currencies will also deflate relative to Gold rather than gain value relative to Gold as people like Bob Prechter think. It's a subtle but important investing concept when one looks over the longer term horizon and tries to protect wealth. Because I believe the deflationary forces in the economy are strong, I believe it is possible that U.S. Dollars can be significantly devalued and yet gain in value relative to real estate and general stocks. But holders of any of these asset classes I believe will lose wealth in Gold terms.

In other words, I believe Gold will buy more paper federal reserve notes (i.e. nominal price of Gold will rise), more real estate and more general stocks in the future. This is not a mainstream concept, as it gets to the core of what true money is likely to be this cycle during the continued economic and debt storms the global economy is facing. Confidence in the U.S. system and its central bankstaz will decrease further as this secular economic crisis proceeds. This is why creditor central banks of the world are now net buyers of Gold - they want to take their excess paper reserves and convert them into a reliable store of wealth.

Such a trend change by central bankstaz in buying Gold is not a brief blip. This is not a "get rich quick" trading scheme happening here. This is a secular shift that will continue for some time to come in my opinion. China is not telling their population to buy silver and Gold and making it easy for them to do so because they want their people to lose their hard earned money. Accumulation of U.S. Dollars over the longer term is now seen as relatively unwise. You may buy this concept or not, and it is not they key point of this discussion.

The second reason the concept of the "real" price of Gold is important relates to the Gold miners. Producing Gold miners can make more money when expenses are decreasing relative to the price of Gold, regardless of what the price of Gold is doing in nominal terms. Like the Wal Mart model, you can cut prices and make higher profits as long as your costs are falling even faster than prices are. The most obvious component of the cost equation is energy, as mining is an energy intensive business. If Gold drops 30% but oil drops 70% (like last fall, for example), Gold miners can make higher profit margins (again, all things being equal, which they are not for individual firms). Higher profit margins can translate into higher profits, which can (not does, but can) translate into higher dividends and/or higher stock prices.

Now, this concept can be attacked and is not fool proof but it gets to the heart of how Gold miners make money. This is why a deflationary environment is more consistently bullish for Gold miners than an inflationary one. Think of the 2007 to early 2008 period when oil was going ballistic - even though the Gold price was rising beautifully towards $1000/oz, oil was rising even faster and further and many Gold miners were unable to increase profits during this time. During a secular credit contraction (again think in Gold terms, not in terms of paper currency units), commodity prices fall relative to the Gold price over long periods of time.

Recent short term action has been bullish for the Gold miners in this regard. Here's a 2 year weekly candlestick chart of the Gold price divided by the CCI commodity index ($CCI):


If this is an early stage rise in this ratio (I think it is, but only Mr. Market knows for sure), it is bullish for the fundamental underpinnings of a significant continuation of the new cyclical Gold stock bull market that began in late 2008. Again, this is fundamental data, not a trading signal. In fact, the lag between a rising Gold:$CCI ratio and rising Gold stock prices can be significant and ironically, a ratio of Gold to oil or a basket of commodities is often rising at a time when the stock market is not doing very well. Gold stock charts should be evaluated and traded based on their own technicals, not based on the chart of the Gold to commodities ratio. However, a rise in this key Gold ratio indicates that the fundamentals for Gold stocks are improving. Because investors are forward looking, it also suggests that fundamentally, Gold in the ground for Gold explorers and developers may be valued higher based on its higher profit potential.

When looking over the longer term, one can see that the secular turn in the Gold:$CCI ratio occurred in the 2001 time frame and appreciate just how big a move happened in the Gold to $CCI ratio in 2008 (20 year monthly log scale candlestick chart of $GOLD:$CCI follows):



The massive spike that occurred in this ratio during the Great Fall Panic of 2008 (which the feds and government were unable to prevent despite all their market intervention leading up to this point) has not yet been fully priced into the Gold miners. If it was, major Gold mining indices would be at significant new all-time highs. If this ratio can maintain at current lofty levels (let alone go higher, which I think it will) for the next few months, I believe the Gold mining sector is going to have a volcanic explosion to the upside in 2010 regardless of what the general stock market does.

Visit Adam Brochert’s blog: http://goldversuspaper.blogspot.com/

Adam Brochert
abrochert@yahoo.com
http://goldversuspaper.blogspot.com

BIO: Markets and cycles are my new hobby. I've seen the writing on the wall for the U.S. and the global economy and I am seeking financial salvation for myself (and anyone else who cares to listen) while Rome burns around us.

© 2009 Copyright Adam Brochert - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 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