Gold mid-tiers’ Q3 2024 fundamentals
All-time-high gold prices combined with relatively-contained costs catapulted unit earnings to another epic record.
When it comes to investing, history has taught us one very important lesson: ideal buying opportunities are formed when there’s significant pessimism towards an investment. In other words, to make it really big, you need to have the guts to buy an investment when everyone else is selling it…when it’s completely out of favor with the majority of investors.
While the general stock market is up close to 150% since March of 2009, there is only one investment that has been hard hit over the past couple of years. Long-time readers of Profit Confidential know exactly what I’m talking about: the shares of quality gold producers have taken it on the chin.
The contrarian in me couldn’t be talking louder; “buy when there’s blood on the street.” Very few investors like gold producers right now. In fact, the Dow Jones U.S. Gold Mining Index is down 60% since October 2012. Over the same period, the Dow Jones Industrial Average has risen nearly 30%. Gold stocks have fallen at twice the rate industrial stocks have risen. This is a rarity.
But the reasons to own the gold producers are becoming more compelling each day.
After putting on a relatively flat performance in 2012 and then declining in 2013, gold bullion prices now appear to be bottoming out. This can be great news for the gold producers whose stocks really trade on the rise and fall of gold bullion prices. The higher gold bullion prices go, the higher the profits of quality gold producers and the higher their stock prices go.
“Michael, it’s not good enough just to say gold bullion prices will rise because they are down and out. Give me fundamental reasons why the precious metal will rise in price.”
Well, here you go…
China has become the biggest gold bullion consumer. (It used to be India, but demand in China has eclipsed demand in India.) For the first time in history, in 2013, demand for the yellow metal in China increased beyond 1,000 tonnes. According to the China Gold Association, jewelry demand in China increased by 43% to 716.50 tonnes in 2013 and bullion demand was 375.73 tonnes—57% higher from the previous year. (Source: Reuters, February 10, 2014.)
So we have a situation in which the number-two economy in the world has become the biggest buyer of gold bullion in the world, while gold stocks are down 60% since October 2012 and while supply at major gold producers has declined because they cut off production at certain gold mines where $1,200-an-ounce gold prices didn’t make economic sense.
From a purely technical point of view, gold bullion prices are showing progress in favor of the gold bugs. See the chart below.
One thing you will notice right off the bat is that gold bullion prices have been trending higher since the beginning of the year. A closer look at the chart shows that on the down days for the price of gold bullion (red candles), you will notice the declines aren’t as big as they were when gold bullion prices were trending downward.
Digging deeper, in December 2013, gold bullion prices declined on nine trading days. The average decline for the price of the metal on those days was $18.07 an ounce. On the other 12 trading days, gold bullion prices increased an average of $8.19 an ounce.
In January 2014, something interesting happened in the gold pits.
Gold bullion prices went down on 10 trading days and the average decline on those days was only $8.15 an ounce. On the 11 trading days the metal went up in price, the average increase was $10.75 an ounce.
This tells us that the selling pressure in January declined significantly.
As gold bullion prices increased since the beginning of 2014, the stocks of the gold producers have gone up about 10%. I’m a big believer in buying an investment when it is bouncing from its bottom. The shares of quality gold producers are offering that opportunity today.
by Michael Lombardi, MBA
