Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
By Moe Zulfiqar for Daily Gains Letter
When it comes to gold bullion prices, despite their mere 10% climb since the beginning of 2012, I wouldn’t be at all surprised to see gold bullion prices increase even further. With this, companies producing or looking for the precious metal are still presenting a great buying opportunity.
Let me explain…
We see demand for gold bullion continues to increase, and at the same time, supply constraints are slowly starting to show. This is something I have been talking about for some time now and at the very core, it is the perfect recipe for higher gold bullion prices ahead.
In 2013, we learned that the Indian government and the central banks have been working together to curb the demand for gold bullion in that country. This was a concern to many because India was the biggest consumer of the precious metal at that time. As a result of this, emotions took over, and we saw massive selling. A little-known fact that never made the mainstream: though the official demand for gold bullion declined, smuggling the precious metal into the country became the next big thing.
According to the World Gold Council (WGC), smuggled gold bullion in the country amounted to 150–200 tonnes in 2013. The WGC also predicts that if the restrictions imposed by India’s government remain in place, then it wouldn’t be a surprise to see an increase in the amount of gold bullion smuggled into the country. (Source: “UPDATE 1-Gold smuggling in India likely to rise if curbs stay-WGC,” Reuters, February 18, 2014.)
But this is just the tip of the iceberg.
We see uncertainty in the global economy is increasing, as well. For example, the troubles in Ukraine continue to show signs of escalation. We don’t think anything major will occur in terms of war, but what’s happening now is just enough for investors to run towards safety, which gold bullion provides.
As this is happening, we also hear about very problematic data that is coming out of the Chinese economy. The country is showing signs of deep stress and there may be a cash crunch—companies strapped for cash are in the making.
Above all, the debt levels in the global economy continue to increase. This means countries are creating more money out of thin air. This is only bullish for gold. Consider this: according to the data from the Bank for International Settlement compiled by Bloomberg, the global debt level has increased 40% since the financial crisis. Between mid-2007 and mid-2013, global debt rose by $30.0 trillion, from $70.0 trillion to $100 trillion. (Source: Glover, J., “Debt Exceeds $100 Trillion as Governments Binge,” Bloomberg, March 10, 2014.)
The sell-off in the gold bullion market in 2013 was a blessing in disguise. It forced gold companies to cut their costs—as gold bullion prices increased, their costs for these companies soared as well. As a result of this, they are cutting back on their exploration expenses, delaying projects, and so on and so forth. This all creates a massive constraint on the supply of the metal.
Gold companies fell victim to the sell-off last year. Since early this year, they have seen some huge gains. I have seen some junior gold mining companies double. Now imagine what happens if the price of gold goes up from $1,350 to say $1,500 an ounce—these companies may double or triple from their current levels.
You just have to be careful when choosing what you buy. There are companies that may look like a great story, but that shouldn’t be the only criteria on which you decide to buy. I would consider companies looking to cut their production costs with high-grade, quality reserves and cash on hand.
