By Kishori Krishnan Exclusive To Gold Investing News
They just can’t see the wood for the trees. Gold investors have been fighting a losing battle, given that most gold miners, and some big ones at that, have underperformed 2009’s 27 per cent rise in gold prices.
Speculative hedge funds have played their own part, distorting the gold price to unheard of levels.
For funds, it is a simple plan: keep the markets elevated so that the average investor is overcome by the glitter and in a herd mentality, pumps in more money into the market. While doing so, no one pays attention to the rot eating away at the foundation.
For deposits are getting exhausted. Gold production is at an all time low. There have been no significant new discoveries for some time now. And this, despite the higher exploration budgets.
Strong local currencies have also raised costs for most miners, outweighing the impact of higher metal prices.
South Africa is a prime example. The country which has produced more gold bullion than any other nation, has been in output decline for 39 years. A strong rand isn’t helping.
A paper recently published in the South African Journal of Science, according to Mineweb holds that South Africa’s gold industry is on its death bed, despite claims of massive existing below-ground reserves.
Also, South Africa’s Harmony Gold, the fifth-largest gold miner, has turned out to be the biggest underperformer of the world’s top 10 gold producers. The firm’s shares dropped a whopping 19 per cent this year, on the back of a strong rand.
In terms of production, “2009 is the outlier as far as the trend,” Omar Jabara, spokesman for US-based Newmont Mining, the second-largest gold producer in the world, told AFP recently.
Globally, “it’s just that the assets are not there anymore,” Tonya Todd, a spokeswoman for Goldcorp, Canada’s second biggest gold mining firm said.
Deposits are being drained across the globe.
“It’s a fact that gold production from mines has been in decline since 2001 and has gone roughly from 85 million ounces to about 75 million ounces a year,” according to Vincent Borg, spokesperson for producer Barrick Gold.
“It sort of goes down about one million ounces every year and our forecast is that it will continue to decline despite (gold’s) higher price,” Borg said.
And check out this shiner: “Just because gold reached a new high today doesn’t mean we can send a message to our 26 mines saying produce as much gold as you can,” he summed up.
On the London Stock Exchange from the start of this month, gold equities have been impacted by the falling price of the yellow metal, with large, mid-cap and small cap gold stocks seeing red throughout.
Take a look at some shares. All prices are as of December 8.
Among juniors, Medusa Mining (AIM: MML), Metals Exploration (AIM: MTL), Cluff Gold (AIM: CLF) and Solomon Gold (AIM: SOLG) all fell more than 4 per cent from their close on December 4.
Also dropping were Norseman Gold (AIM: NGL), Mariana Resources (AIM: MARL), GMA Resources (AIM: GMA), Pan African Gold (AIM: PAF) and Patagonia Gold (AIM: PGD). Elsewhere Chaarat Gold (AIM: CGH), Archipelago Resources (AIM: AR.), also slid.
The trend continued on December 18. Dragged back by weaker resources stocks, the Australian share market closed down.
To sum it up: the easy leverage is over, as is the easy gold.
Operations that were boderline profitable have already witnessed huge price rallies, and the leverage factor is now priced in.
For miners, the low hanging fruit of yesteryears is all gone. And expenses are only increasing, with even firms that sell mining equipment jacking up prices to capitalise on the bull market.
Still want to own gold stocks? You are not alone.
For as the economy improves, investors who fear rampant inflation riding piggy back on the massive government stimulus programs have turned to gold in droves.
Even central banks, which were net sellers at the start of the year, decided to do a double check and turned into net buyers.
On Thursday, gold got hammered. The dollar rose to the highest level in three months against the euro. Stocks and commodities fell, as Greece’s downgrade triggered worries that spiraling national debts could put a stay to the global economic recovery.
The US dollar reached multi-month highs against the euro and the British pound as traders factored in not just the Fed but also Standard & Poor’s downgrade of Greece and a surprising dip in UK retail sales.
Despite this, some guys can’t see the writing on the wall.
JP Morgan has said it expects its South African gold share picks to outperform gold prices in the next six months.
“We see upside in the rand gold price and in our South African gold share picks despite the challenging near term operating environment,” the firm has said and lists AngloGold and Gold Fields, the world’s third- and fourth-biggest gold miners, amongst its top picks.
So, what does one do, given that there are still some gems left in the dirt.
Read between the lines. Listen carefully and go beyond the shrill cacophony of some gold companies. Research them well and take calculated risks.
Some analysts also highly favor holding gold bullion, gold exchange traded funds, and gold futures (if you want to take a riskier position with more leverage).
The choice is yours - and so is the profit!