Things That Make You Go Hmmm - Such As The Spread Between Gold And Gold Miners

Tyler Durden's picture




 

From Grant Williams, author of Things that Make You Go Hmmm

Newmont Mining currently trades near a 52-week low and has a dividend of just over 3%. Newmont’s dividend is indexed each quarter to the average price of the gold it sells in that quarter with step-up provisions of a further 7.5c if the average gold price exceeds $1,700 in a given quarter and a further 2.5c should those sales average in excess of $2,000. The company has a cash cost of gold mined of around $650/oz and is working hard to lower that figure. Analysts figure that earnings will hit an all-time high this year of close to $5 per share. The P/E ratio? That would be 11x. The same metric in 2008? 30x.

Newmont Mining is currently trading roughly $20, or 40% below the average analyst target price of $67.23 with a yield 50% higher than that of the S&P500 and a P/E ratio 30% lower, while its price-to-book ratio, at 1.8x, is also extremely close to the 2008 lows.

If we revisit the performance of NEM, GDX and GDXJ when priced in ounces of gold, it becomes apparent just how beaten up this particular sector has become.

NEM and GDX are at levels comparable to the very depths of 2008 (chart, previous page) and, when comparing the state of the world now versus then, it is incredibly difficult to understand just why that would be.

Remember, in the Autumn of 2008, panic was at its zenith and good stocks were being thrown out along with bad as deleveraging took hold of the world.

Since then, a number of key metrics that directly affect the price of gold and gold miners have changed so it makes sense to see  where we stand:

Now, with that as a backdrop, and with the understanding that, as we approach the endgame for Europe, the choice facing those empowered to make decisions about how it ultimately plays out is actually a fairly simple one—allow massive, widespread sovereign defaults and a continent-wide bank-run or print unlimited amounts of Euros—is anyone still confused about how this will all play out?

Europe’s ‘leaders’ will NOT arbitrarily choose to inflict the pain necessary to deal with the current debt crisis when they have the means to print free money at their disposal and the only impediment to doing so is an as-yet undetermined percentage of 81 million German citizens. If Germany has to leave the EU in order for the moneyprinting to happen, then mark my words, they will leave—either because they choose to or because the ‘Latin-bloc’ (which now includes France) force them to. Either way, the end will come in a shower of confetti paper money.

There may well be a period of deflation or deleveraging prior to inflation taking hold, but with inflation the central bankers’ firehose of choice, we can be fairly certain that inflation is in our future and inflationary environments are good for gold. As for the period of deflation/deleveraging which we are seeing now, using the greatest deflationary period in history as our example would seem to suggest that gold stocks will perform extremely well under those conditions also.

The fact that gold stocks are behaving so poorly seems to be as a result of both misunderstanding and inadequate knowledge of history on the part of the vast majority of investors and, as we have seen with subprime, Greece, Spain, Italy and, one day, Japan, the UK and the US, nothing matters to anybody until it matters to everybody.

More in the Full report

 

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Sun, 06/03/2012 - 14:54 | 2489507 ACP
ACP's picture

Don't misunderestimate gold, bitchez!

Sun, 06/03/2012 - 14:59 | 2489514 Future Tense
Future Tense's picture

It is sentiment that is keeping gold mining shares down, not fundamentals. Everyone is expecting another 2008 style crash and for the miners to once again get crushed. The following provides an excellent view at how sentiment is impacting all asset classes and what that means for the second half of the year:

http://www.ftense.com/2012/06/2012-second-half-outlook-introduction.html

Sun, 06/03/2012 - 15:02 | 2489521 SHEEPFUKKER
SHEEPFUKKER's picture

Dear gold manipulators(and you know who you are)- if you force the price of gold down, the miners cannot be as profitable, and if they cannot be as profitable, they will not spend money on new projects, and if they do not spend money on new projects, there will not be as much supply, and when there is not as much supply, the price will go up.  So get fucked manipulators, you will lose in the end. 

Sun, 06/03/2012 - 15:08 | 2489528 Manthong
Manthong's picture

Who would be so uncivilized as to invest in a bunch of barbarians scratching for relics?

The "smart money" is much too wise for that.

Sun, 06/03/2012 - 16:50 | 2489827 Dr Benway
Dr Benway's picture

LOL. It is a new world, and 3% yield denominated in paper money that depreciates faster than that is not great, mmkay???

 

 

move on

Sun, 06/03/2012 - 17:17 | 2489905 The Big Ching-aso
The Big Ching-aso's picture

 

 

They can pull a Hugo on miners at any time.  And IMO they eventually will.

Sun, 06/03/2012 - 18:14 | 2490022 Cadavre
Cadavre's picture

Article says :Europe’s ‘leaders’ will NOT arbitrarily choose to inflict the pain necessary to deal with the current debt crisis when they have the means to print free money at their disposal and the only impediment to doing so is an as-yet undetermined percentage of 81 million German citizens.

.... NOT arbitrarily choose to inflict the pain necessary to deal with the current debt crisis

They have 3 choices - it is beyond arbitration or the count of the "yeahs":

1) Either repudiate all debt, ...

2) Or, force the banks, bond holders and CDS writes to settle without claiming sovereign assets, ...

3) Or, (and this is the fun one), they learn there are fates worse than being seated next to the bathroom at a 200$/plate Manhattan "All the Pork You Can Eat" yuppie dining parlor. Maybe ghost busters can raze the ghost of Mussolini , and allow him to explain  the kinds of things that are less enjoyable than a table for two next to the "John"!

It has always worked, or always not worked, depending on what side of the Shadow Bankers' 3 Card Monte Kiosk one is positioned.

.... as-yet undetermined percentage of 81 million German citizens.

When choosing sides always go with the numbers. Is societal matters, 99 individuals will always trump 1 individual in a contest of power.

Accept it. Pain comes in all sorts of flavors and colors. So choose, at your own peril,  muth'a f*cka's!

Sun, 06/03/2012 - 21:37 | 2490512 Augustus
Augustus's picture

You might be interested to know that the 3% can be used to buy more shares or even physical gold.  I have never located gold in physical form which increased in ounces, no matter how long it has been held in the family.

HTH.

Sun, 06/03/2012 - 17:43 | 2489966 Treeplanter
Treeplanter's picture

I'm expecting the bullion banks will do the naked short thing one more time.  I'm buying juniors like NG and EXK like crazy on the next bottom.  Things will soon get too shaky for them to smack prices down very soon, the buying  pressure would destroy them.

Sun, 06/03/2012 - 18:29 | 2490067 Cadavre
Cadavre's picture

 

I'm expecting the bullion banks will do the naked short thing one more time

Question is, do they have enough liquidity to meet that fat margin requirements?

The FED needs to un-hypothocate it's "dark pook" liens on the "other peoples" precious in their custody. The demands for repatriation are getting louder and beginning to hint undertones of extreme prejudice.

What will the Ben do when Maurice drains the lizard throttling his fundio and finally pulls out (without the usual offer of a complimentary reach around)? It will get sticky - mighty sticky - and that be for sure.

One word Ben - FEAR - I'd buy front row center tickets to that for a dollar!.

Sun, 06/03/2012 - 15:32 | 2489603 Bay of Pigs
Bay of Pigs's picture

"the miners to once again get crushed"?

They have gotten crushed. Gold/XAU ratio at historical highs, and its been that way for months on end. Since 2008, the miners have never come back to 'normal' levels with respect to the price of metal.

Sun, 06/03/2012 - 14:59 | 2489516 resurger
resurger's picture

word!

Sun, 06/03/2012 - 14:54 | 2489508 bankonthebust
bankonthebust's picture

The spread exists because those who realize the value of gold want the metal. Not some digital piece of paper.

Sun, 06/03/2012 - 14:57 | 2489511 A Lunatic
A Lunatic's picture

Physical gold is what's in the safe.......not some potentially bullshit promise that a company in Korea is going to dig it out of the ground at a profit and give me a percentage of the take. I'll take physical at any cost. The spread does not make me go Hmmm.

Sun, 06/03/2012 - 15:02 | 2489519 scatterbrains
scatterbrains's picture

or the threat of seizure/nationalization.

Sun, 06/03/2012 - 18:01 | 2490008 LawsofPhysics
LawsofPhysics's picture

Riiiggghht.  At which point it simply becomes "what gold?"  Moron.

Sun, 06/03/2012 - 16:22 | 2489748 disabledvet
disabledvet's picture

What's your opinion of "meteor mining"? I'm thinking of going "all in" when Space X IPO's.

Mon, 06/04/2012 - 02:11 | 2490871 Cadavre
Cadavre's picture

Meteors beget meteorites. Perhaps a SpaceX that could deploy a butterfly net (of sorts), would be used to harvest meteors.

"Like" the idea of SpaceX. Lot's of patents financed and held by the commons have come out of NASA. What's the revenue stream? The few holding companies that control the market and almost all the industrial and services sectors are busting at the seams with "stuff". It seems that the only marketing "plan" these days has nothing to do with competing on innovation and value and "growing a market base". Sure, on paper the plan feigns some kind of argument to finance product placement, but the reality is that startups, these days anyways, are more interested in marketing themselves as an investment than a revenue producer.

Can SpaceX launch rendezvous and return more cheaply than Soyuz? Russians got a knack for delivering the same, or better outcomes at infinitesimally smaller fractions of the costs consumed by US funded projects. Read an old issue of "Omni" published during Reagan's "star wars" extortion era. Both countries were looking to build particle accelerators that could be deployed in orbit. US built a 50 mile circumference "donut" shell (guessing the idea was to build a really big really expensive one first and to be followed by a series of more and more miniaturized "proof of concept" projects - lot's o-bucks in the world of cost plus for those kinds of state projects.

Meanwhile, back in the CCCP, in a sooty one time machine shop and nothing but pencils, slide rules, paper copper tunes and brazing material, a couple of wild and crazy guys built a working 15 ft linear accelerator right off the f*cking bat, for less than the annual cost of one full time Mickey-D burger flipper!

No money to be had from efficient reliable outcomes that don't cost much back in the US, back in the US, back in the USA!

Soyuz has seating capacity for 3. Russia bills the US about 63 Million a round trip seat. Cost of a space shuttle :: space station rendezvous (for 7) was over 200 Million a seat (total launch 1.5 Billion)

Soyuz could deliver 3 US astronautic and return autonomously (like those systems planning inc. devices installed on those planes them Micro$oft Flight Simulator trained pilot trainee box cutter pirates managed to usurp their way into the stuff legends and lies are made of).

SpaxeX is all over the board with per seat costs - 20 Million - 60 Million. But total launch costs are not always implied in the "seating" cost. SpaceX is advertised to launch 7 people (at some later date). SpaceX is a cost plus NASA project. The boosters sure look like them commons financed delta IV boosters NASA uses. SpaceX is also subsidized with taxpayer funded launch and mission control assets.

It sounds like SpaceX is a NASA project garnished to appear as a self-made enterprise  - but in reality is almost totally paid for out of the pockets of the commons. A lot of the promises ("you can believe in ") in are nothing more than concepts and "artist rendering". A boondoggle for insiders feeding at the commons credit trough, like Solyndra was to solar panels, so is SpaceX "the future of space flight - real change you can believe in". When the budget knife hits the cutting board how much of any foreseen outstanding SpaceX IPO equity will go into the slop bucket with everything else?

What about the X-Plane? Supposedly launched into a successful year long orbit (huh?). Does that mean they couldn't make it "land"?

If an endeavor is sold as "private", then why is the commons paying for all of it? Sounds like collective, instead of private, enterprise to my pet gerbil.

Seen some really innovative technology - like infrared voltaic material reported  800% more efficient than current photo voltaic technology that could be applied to an  existing roof simply by "spraying" a batch of the stuff on the shingles - and haven't heard nary a' since initial PR - the promise disappeared (again), probably, into the same warehouse Indiana's Arc of the Covenant was stashed away in. Then, ta-da-daaaa, the one, the only:  Bloom Servers, breadbox sized solid state natural gas electric generators that could power your entire house really cheap. A brief one day sis-boom-baa, and then silence.

Some how, it just seems, to the gerbil anywaze, mind ya, that technology that would significantly reduce end user costs never seem to make it beyond the initial PR. The ones that do increase costs to end users get stamped "APPROVED", even, like recent pharmaceuticals, the delivered outcomes endanger, and sometimes kill, the end user.

Why is that?

Guess someone else has a better idea than we of what is good for us, and what ain't ....

Sun, 06/03/2012 - 16:47 | 2489815 chinaguy
chinaguy's picture

" A gold mine is a hole in the ground with a liar at the top."

Sun, 06/03/2012 - 14:58 | 2489512 Yellowhoard
Yellowhoard's picture

Gotta love NEM. Gold with yield.

Sun, 06/03/2012 - 15:05 | 2489527 urbanelf
urbanelf's picture

But but but gold is unproductive Munger Buffett and stuff!!!

Sun, 06/03/2012 - 14:59 | 2489515 Stuck on Zero
Stuck on Zero's picture

Miners face: extreme environmentalists, strong political forces, overseas government takeovers by crackpots, 10 year development cycles, escalating energy costs, massive CapEx's, loss of sentiment, and gawdawful mine accidents.  Since they can only add 1-2% to the world's stockpiles every year, anyway, why bother?

Sun, 06/03/2012 - 15:04 | 2489524 Yellowhoard
Yellowhoard's picture

These are all good reasons to own a geographically diversified miner with relatively low costs per ounce.

The fact that the amount produced in a given year cannot affect the current price materially is a plus.

What other commodity industry can do this?

Sun, 06/03/2012 - 16:30 | 2489768 disabledvet
disabledvet's picture

I've always had my doubts about Canadien...ahem..."government"...if you know what I mean. I mean "the history of corruption from our Northern neighbors" is legendary. I'll never forget that one scandal...that one where the guy...did that thing. Remember that? And of course mining companies have always been mistreated up there ever since. Heck you can't even get a permit to drill for water up there anymore from what I hear.

Sun, 06/03/2012 - 16:47 | 2489816 A Lunatic
A Lunatic's picture

I too remember what that bastard did. And those other guys..........holy shit. I'm glad you brought that up so other posters here can stay the Hell away from that place.

Sun, 06/03/2012 - 15:11 | 2489546 Jack Sheet
Jack Sheet's picture

There were good profits to be made from miners as a group from 2009 up to the last gold peak of 2011 as the HUI index demonstrates. 

http://www.bloomberg.com/quote/HUI:IND/chart

check the 5 year chart. There is no reason to believe that similar gains cannot be made in the next leg up in physical gold.

I see a good case for diversification from physical metal via  a small position in a fund like the Tocqueville that spreads the risk over >70 majors and juniors. Or in a group of dividend-paying individual producers.

At least you can't lose the shares in a boating accident.

 

 

 

Sun, 06/03/2012 - 17:30 | 2489934 Jack Sheet
Jack Sheet's picture

And skeptics might benefit by listening to this interview (all of it- it is short)

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2012/6/3_Donald...

Sun, 06/03/2012 - 15:14 | 2489554 grey7beard
grey7beard's picture

>> extreme environmentalists,

Now that's funny.  And Obama's a Marxist.

Sun, 06/03/2012 - 15:46 | 2489650 toothpicker
toothpicker's picture

add naked shorting to that list

Sun, 06/03/2012 - 16:10 | 2489725 delacroix
delacroix's picture

the mining shares and etf's are mercilessly shorted, as a component of the overall suppression policy. although I believe price control, is the main objective.

Sun, 06/03/2012 - 21:15 | 2490465 jekyll island
jekyll island's picture

Stuck,

If you think gold is going higher, the mining stocks will eventually overtake the price of gold to the upside, in some cases by many multiples.  If you have a good position in physical, mining shares are a tool to create wealth, where gold functions more as a store of value. 

Sun, 06/03/2012 - 15:01 | 2489518 CvlDobd
CvlDobd's picture

I'm more concerned about the spread that STILL REMAINS between US equities and every other risk asset since October 2011. Treasury Yields, Copper, EAFE, Emerging Stocks, etc are all suggesting the 500 needs to be at least 150 points lower IMO.

Sun, 06/03/2012 - 15:06 | 2489530 gwar5
gwar5's picture

I've been watching the spread. The spread is incredible and a once in a lifetime buying opportunity. 

 

It's going to change PDQ when the panic sets in when they will be seen as one of the few real safe havens.  They will go up multiples faster than physical. But in a true TEOTWAWKI, nothing will beat a lumpy mattress that can't get nationalized.

Sun, 06/03/2012 - 15:07 | 2489532 El Oregonian
El Oregonian's picture

"Whats that baby?" "It's my over-sized Gold Finger just waiting to place it in your secure vault for safe keeping, Do you mind?" "I like this Odd Job, James..."

Sun, 06/03/2012 - 15:08 | 2489533 yabyum
yabyum's picture

I try to use miners as a tool to get fiat, fiat begates phyzz. My scorecard in the last year has been dismal at best.

Sun, 06/03/2012 - 15:14 | 2489557 Jim B
Jim B's picture

Me too, but I bought some Newmont a couple of weeks ago.  Gold has to go down "a lot" (which I doubt) or Newmont is going to have a good run eventually.  Plus it pays 3%! LOL

 

Sun, 06/03/2012 - 15:10 | 2489535 Arnold Ziffel
Arnold Ziffel's picture

I dumped my miners when I saw the CEO of a major gold miner taking a massive bonus while not sharing the bountiful profits with shareholders in the way FCX did; i.e., dividends. I don't know if he later did but I do know many people were complaing when I sold.

I still hold FCX but avoid the others since management at many stink imo...too greedy. If management feels they have no place to invest the profits then hand it out to shareholders...that's the way it used to be before greed saturated most companies.

 

Sun, 06/03/2012 - 15:31 | 2489609 Jim B
Jim B's picture

And the other gangster CEOs are any better?  

 

Ceo pay in general is out of control

 

http://www.forbes.com/lists/2012/12/ceo-compensation-12_land.html

Sun, 06/03/2012 - 20:28 | 2490338 LeonardoFibonacci
LeonardoFibonacci's picture

Yes but will they be safe in their mansions when they come

Sun, 06/03/2012 - 19:32 | 2490191 ThisIsBob
ThisIsBob's picture

If management is getting away with lining their own pockets with the profits, what do they care what the stock price is?

Sun, 06/03/2012 - 15:13 | 2489551 CommunityStandard
CommunityStandard's picture

Didn't realize that gold stocks were underperforming as much as this.  It does make sense though.  If you're betting on the economy, you are long the market.  If you are betting against the economy, you are long physical PMs.  Gold stocks seem to be a half-assed middle bet.  But who knows, a long timeline for can-kicking might make this a good play for a long time.

Sun, 06/03/2012 - 15:16 | 2489560 Pumpkin
Pumpkin's picture

Nationalization would be my guess for the spreads.

Sun, 06/03/2012 - 15:18 | 2489569 The Axe
The Axe's picture

Tyler my crazy gold bug friend...somebody wants the other side of your trade...http://online.wsj.com/article/SB10001424052702304821304577440841899953710.html?mod=djemheard_t

Sun, 06/03/2012 - 20:28 | 2490337 Al Huxley
Al Huxley's picture

No, somebody's setting up the dumbest of the dumb money, trying to get them sell (or short) at the absolute bottom.  This when the commercials have cut their own short positions in the metals to record lows.

Sun, 06/03/2012 - 15:26 | 2489591 Tirpitz
Tirpitz's picture

If Germany has to leave the EU in order for the moneyprinting to happen, then mark my words, they will leave...

Highly doubtful. Why should Germany leave, after all? The currency union played well out for the international corporations calling the shots in Germany. While the screwed taxpayer will be stuck with the growing bill for the ongoing bailouts - of the international banks, mind you - , corporate Germany can reap all the benefits such a straitjacket for the PIGS will offer her. From cheaply imported labor to efficiently destroyed foreign competition to exchange rates an independent Germany could only dream of.

Germany, as the major beneficiary of this doomed project, will rape her taxpayers to the breaking point before giving up the currency union.

Sun, 06/03/2012 - 15:29 | 2489602 Uncle Remus
Uncle Remus's picture

I am pretty sure they haven't shut down the bear halls in Germany yet.

Sun, 06/03/2012 - 15:36 | 2489621 Tirpitz
Tirpitz's picture

How's that saying goin in Bavaria:

panem (et ursi) et circenses for the people...

Sun, 06/03/2012 - 15:43 | 2489644 Uncle Remus
Uncle Remus's picture

Let me rephrase - it's history and it rhymes with Versailles, as in Treaty of.

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