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Deep Dive into VanEck's Gold and Miner Analysis

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by VBL
Sunday, Jul 31, 2022 - 16:07

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GoldFix on VanEck on Gold

Summary:

Authored by GoldFixSubstack

The following is VanEck's complete slide deck from a July 26th Gold presentation including their key points. GoldFix analysis was added (pro and con) with genuine questions in italics. Comments include heavily footnoted points designed to help Gold and Silver investors make more informed decisions.

VanEck Advisors released a quarterly report in combination with a webinar for investors. We went through it and summarized their points along with the accompanying slides/graphs. Some context first. We go into all precious metals research readings with 3 beliefs/biases.

  1. We are extremely bullish Gold and Silver as stores of value growing in importance for the world in coming years.2
  2. All corporate research is designed to get you to act in the short term to generate fees3
  3. Good research like this piece helps fine tune and test our own beliefs.

Here we go....

1- Gold Consolidates, Remains Range-Bound (For Now)

VanEck: Gold remains range-bound following the evaporation of the Russia/Ukraine “war premium”

GoldFix: No. It is ill advised to think war premium is gone. Implies that gold will not drop if the war were to spontaneously end tomorrow. Assume gold would drop if war were to end. Also assume war can end but things will not heal for a decade or so. Therefore buying a hard dip post war is not a bad idea.

VanEck: Gold’s currently forming a base around $1,800 per ounce, with inflation and fed tightening driving price action in the near term.

GoldFix: If inflation were driving price action, Gold would be $3,000. Therefore something is wrong. (continues...)

VanEck: Broader financial markets remain susceptible to larger risks over the longer-term, though (i.e., spiraling inflation, recession, unserviceable debt burdens, geopolitical upheaval)—any/all of which could eventually drive higher gold prices.

GoldFix: Yes, all of this is true. The question is what is the catalyst for higher prices and do we even care as long long term owners?  (continues...)

 

2- Dollar/Gold Inverse Trend Not As Strong This Year

VanEck: Historically, the U.S. dollar and gold have exhibited a nearly perfect inverse relationship (1970’s and 2000’s)

GoldFix: Yes. Why the change in 2000? (continues...)

VanEck: This relationship has come undone, somewhat, with gold mostly moving sideways during the dollar’s recent rally.

GoldFix: Yes, very much so. The obvious reason is war premium4. But there is more to this (continues.....)

VanEck: Recent dollar strength stemming from zero-rate policies in Japan, war in Europe, and rising rates in the U.S.

GoldFix: Yes. Since the war started the Ruble has been the strongest trending "money" on earth5. The dollar is mostly being compared to other G7 countries. It is the cleanest dirty dish.

 

3- Rate Hikes Haven’t Always Slowed Inflation

VanEck: The current cycle (teal colored line) resembles the August 1977 to March 1980 cycle (purple colored line), in terms of the levels of inflation at the start of the cycle

GoldFix: Yes. Even more than you note (continues...)

VanEck: In that cycle, the Fed increased the funds rate from 6% to 20% in 31 months, hitting the breaks because of an economic recession, and all the while inflation just kept rising from about 6.5% to 14%

GoldFix: We prefer to go back to 1972 or at least 1975 (when inflation was artificially decreased for a year).

VanEck: The U.S. Fed is also hiking at the same slow pace as 1977—question remains whether the Fed will pause its rate hiking if/when a recession sets in?

GoldFix: the Fed is constrained from doing what it needs to control inflation for good. Therefore it will raise, but chase inflation as it did starting in (continues...)

 

4- Cost Improvements Aiding With Higher Margins

 

Van Eck: Recent cost inflation has driven allin sustaining costs to $1,150 per ounce (on average)

GoldFix: Interesting.6 2022 is an estimate. Where was oil when that estimate was calculated? How does it look for the first 1/2 of realized 2022 vs that estimate? Are there signs cost basis is slowing/rising? What was different about 2012 than now in terms of cost? What does this look like if oil remains $100+ for a few years?

VanEck: However, margins [Edit: are/were/will be?] healthy

GoldFix: We do not like an important verb being left out of the slide and hope it is only a typo. Otherwise this is good. Rate hike effects have likely not been felt yet. Can we see interest rate hikes in isolation (continues...)

VanEck: Increasing margins have helped disciplined companies generate substantial free cash flow

GoldFix: Yes. Define “disciplined” as it pertains to EBITDA, financial leverage, price hedging and any other criteria you use please.7

 

5- Gold Miners Are Undervalued Based On Current Cash Flows

VanEck: Gold miners have rarely, if ever, traded below five times (5x) price to-cash flow—particularly within the last 15 years’

GoldFix: That is a good parameter. Do you think (continues...)

VanEck: Historically, gold miners’ shares have actually rallied hard off such low valuations

GoldFix: Over what average time frame?

 

6- Attractive Valuations Aren’t Just On An Absolute Basis…

 

VanEck: Valuations (highlighted in teal) remain at or below long-term average valuations AND attractive vs. most other sectors

GoldFix: How does this look on 20 year and 5 year comps please? Why does this persist? If this implies (continues...)

VanEck: Steady gold prices, focus on shareholder returns and attractive valuations present a compelling case for the miners

Goldfix: Which companies have the securest dividends? Which companies are most likely (continues...)

 

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