Denver (Kitco News) - After reaching a collective bottom in December, last week’s negative price movement has thrown gold mining stocks back into uncertainty and speculation of future weakness is growing.
At different periods during the month of December, the GDX, GDXJ, HUI and XAU all reached their respective bottoms and after a strong start to the year, the mining sector is back in the red. Its gains were essentially wiped out over a three-day period, during gold’s significant decline last week.
“As a result of the last week’s actions, we’ve taken out the year-over-year positive returns of the gold mining stocks, so, that’s really amazing,” said Don Coxe, chairman of Coxe Advisors LLC, in a telephone interview with Kitco News. “Year-over-year gold is now down but it was up as of last week.
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| From Left to right: Paul Burton, Don Coxe, Brent Cook, Adrian Day |
“Now you’re in a position where it’s better to own government bonds than gold stocks – that won’t last,” he said. “What is amazing to me is that this occurs against the backdrop of the worst geopolitical environment in 25 years, which should’ve been extremely good for gold.”
Speaking with Kitco News at the 25th Denver Gold Forum, Adrian Day, chairman and chief executive officer of Adrian Day Asset Management somewhat agrees.
“I think investors think, rightly or wrongly – that can be argued – that gold prices should be doing better,” he said. “We had a very good run at the beginning of the year, then it fell back, then we had another run and it fell back and I think investors are frankly very skittish.
“They’re afraid of not just losing all of their gains, but they’re afraid of another 20%, 30% or 40% decline,” he added. “When you have a decline like gold had last week, investors sell the stocks without regard to value or quality, they’re just afraid of being in it when it drops.”
Despite the recent shortcomings in gold prices, Paul Burton, managing director at Piran Mining Research, and Brent Cook, editor of the Exploration Insights newsletter, do see some value in mining stocks.
“Companies that aren’t producing are still confident that still want and can bring projects on stream, so they certainly see that there’s a future there,” Burton told Kitco News in Denver. “They’re looking to get cash flow as soon as possible, a number of them have a bigger project but are reigning in starting very small. The phrase starter-pit came up a number of times.
“Selectively there is value in the junior space,” Cook said in Denver. “The issue is you have to value these things by how much money a deposit can make and will make, and then what value it is to a larger company in terms of acquisition.
“The bottom line is it’s really hard to find high-quality deposits, they’re just very rare,” he added. “That’s the reality of it.”
The U.S dollar has been the belle of the ball recently, but analysts aren’t convinced that recent the recent dollar rally is sustainable long-term, but the short-term is a little dicey.
“In the next month or two, gold is very vulnerable to a decline,” Day said. He added that scenario could drag gold stocks, further.
“On the other hand, I do see some strong fundamentals in gold,” he said. “Gold stocks, as a group, are very inexpensive on a historical basis and any valuation metric on a historic basis.”
Burton, who said he’s not hugely bullish on gold, doesn’t see the U.S. dollar keeping up its big rally long-term.
“I think this U.S. dollar strength seems to be the key thing at moment, I just can’t see that being sustainable, he said. “I still think there’s a lot of poor companies out there that are still in the mix and this bottoming could be a good thing for weeding out the poor companies.”
Cook echoed those remarks regarding junior companies scraping along.
“They’ve been remarkably resilient, I’ve got to say,” he said. “I expected a lot of them to go but they’ve been doing these small financings with friends and family, paying people in stock rather than money.
“I think it’s going to happen, it just hasn’t happened as quick as we might’ve expected, he said. “Since December we’ve had two rallies, so they were able to raise money during those rallies, and if we get another one next year, they’ll survive another six months.”
Burton also noted that funds have not been as eager to jump into the fold.
“One of the reasons that company share prices have not really moved as much is that a number of the funds were fully invested a few years ago and they’ve seen huge losses,” he said. “They’re sticking with their book, there’s no new money coming in.
“Until new money comes into the fund, they’re not going to sell their stocks because they’re underwater, so there’s no new money available for buying new stock,” he added. “I think that’s one of the bottlenecks of the industry.
Day added caution when looking at the gold industry and gold mining stocks.
“Trying to time the gold market, trying to be too clever, is not always the best approach,” he said.
Coxe added his view of a disappointing market.
“The definition of really disappointing market is one that gets the kind of news it should have to go up, and it goes down,” he said. “We went in a matter of a week from $1,320 gold up to $1,390, then agave it up, and since then, every rally has been a failing rally.
“There’s no doubt about it that what we’re seeing now is liquidation on an amazing scale,” he added.
By Alex Létourneau of Kitco News aletourneau@kitco.com
Follow Alex Letourneau @alex_letourneau
