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by Emmeran Eder, Euro am Sonntag
The gold bull market took a break. Some of the investors took profits, and a consolidation was overdue. The shares of gold producers also fell in the past two months, after having risen even faster than the gold price since the beginning of the year. Now the chances are good that the correction is coming to an end and gold mining stocks will soon resume their uptrend.
The time of year speaks for it. Since 1985, November to February has always been the time in which the price of the precious metal and, in its wake, the mining stocks achieved the best return. In addition, the results for the third quarter will be published in the next few weeks. These are likely to be very good in most cases. If only because because of the lockdown in the first half of the year, many mines were completely or partially closed and then reopened. The production volume rose in the third quarter, which has a positive effect on the companies’ earnings – as does the high gold price.
But this is only one factor why gold mine operators are doing better than they have been in a long time. At the same time, the energy costs, which make up around a quarter of the total costs, are low due to the lower oil price.
The mix of low costs and a high gold price ensures an extensive profit margin. Little is likely to change in this regard for the time being. The surplus on the oil market and the stronger focus on environmentally friendly energies are dampening the demand for the black lubricant. “This is where the current situation differs significantly from the gold bull market between 2002 and 2011,” says Norman Villamin, investment strategist at the Geneva-based private bank Union Bancaire Prive. At that time, the price of oil exploded from $ 20 to $ 140 per barrel.
The current favorable constellation has even allowed profit growth in the industry to climb to a higher level than in the high phase of the bull market. Hannes Huster, precious metals analyst at the information service “Der Goldreport”, is not afraid that profits will collapse. “Only at a gold price of 1,600 US dollars per troy ounce and an oil price of more than 60 dollars would it hurt the gold producers and the margins could erode significantly,” he says. “Many large gold miners are currently money printing machines that bring in hundreds of millions of dollars in cash every quarter,” he says of the future.
The high cash flow should ensure higher dividends. One example is the Canadian company Kirkland Lake, owner of the Fosterville mine in Australia, one of the largest mines in the world. The company’s cash holdings recently climbed to $ 850 million, resulting in a 50 percent increase in dividends.
It was not least because of this fact that Warren Buffett bought the industry giant Barrick Gold. So far he has been skeptical about gold as an investment. He considered it inefficient and unproductive. But now Buffett apparently sees the great intrinsic value and high cash flow of the industry and has changed his mind.
The evaluation is favorable
In addition, the sector is favorably valued. This can be seen from the fact that the NYSE Arca Gold Bugs Index, which tracks many of the most important global gold producers, has performed far worse than the gold price since 2011. The gold mining stock sector is currently valued as cheaply relative to gold as it was last in the financial crisis, even though the price of the yellow metal has soared. “The valuation of the shares in the sector is too low compared to the past 20 years. There is still room for improvement here,” said Huster, optimistic about the sector.
Also because the debt has been reduced in recent years. Many unprofitable mines have already been closed and written off when the price of the yellow metal was still low. “Gold producers did their fundamentals homework during the last gold bear market,” said Villamin. Huster does not see a scenario like in the years 2012 to 2015, when the gold price and gold mines went into reverse. Back then, the boom producers would have made expensive and unwise takeovers that they would later have to write off.
Today, however, the opposite is the case. So far there have hardly been any takeovers, although the gold miners are sitting on bulging coffers. “The respect is too great to fall into a trap similar to that in 2011 and 2012,” says Huster, explaining this behavior.
However, the Corona crisis also contributed to this. Because of travel restrictions, it was hardly possible to take a closer look at other companies and to take over. That will likely change soon, as the pandemic is weakening in the regions where the majority of the mines are, i.e. in South America, Mexico, Canada, Africa or Australia – unlike in Europe. This takeover fantasy could further fuel stock prices in the sector.
No more protection
But it is not that far yet. Especially since investors should also be aware of the risks. Gold mining stocks are very volatile and move around the gold price in a leveraged manner. Since almost all mining companies no longer hedge their gold production on the futures markets, declines in the gold price quickly have a negative effect on their profits.
The dangers also include a sharp rise in the price of oil or an appreciating US dollar, since this usually goes hand in hand with falling gold prices. Rising interest rates would also put a strain on the gold price and thus the mining companies.
At the moment, the opportunities outweigh the dangers. Since individual stocks are extremely volatile, and in order to eliminate the risk of individual stocks, investors with an active fund or an ETF should diversify across many stocks.
Gold versus gold mines
Since 2011, the shares of gold producers have performed significantly worse than the gold price itself. On the one hand, this is due to the fact that the shares react to the gold price in a levered manner. If this goes down, as it did from 2012 to 2015, stocks lose more. Homemade problems such as excessively expensive takeovers also weighed on.
The ETF tracks the NYSE Arca Gold Miners, one of the best-known indices for gold mining stocks. This includes many of the most important global players in the sector. The two largest index positions Newmont Mining and Barrick Gold together have a share of 23 percent. Investments are primarily made in Canada, the USA and Australia. The fund grew by 38 percent within twelve months and by 146 percent in five years.
The actively managed fund mixes large and medium-sized gold producers and explorers. Therefore, the unit price fluctuates sharply up and down. There are no dominant positions, but a wide spread over many titles. The focus is on Canada and Australia, which currently make up 80 percent. Over the year, the fund grew by 75 percent, and within five years by 213 percent. The product is duly not a bargain.
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