Relatively Solid Article on Gold/Gold Miners

The Divergence Between Gold and Gold Miners

While I do not necessarily agree with the writer’s assertion that mining costs are likely to keep rising, short/intermediate-term, the writer has got the theory right. Gold mining leverage to gold will be positive when gold is either rising faster than costs. But it really does not matter whether gold rises faster or drops less. Positive leverage is implied for the miners either way.

I get these market roundup articles with my subscription to Simply Wall St, which I keep for handy fundamental reference on individual equities. They have a massive database of fundamental metrics and news on individual stocks.

The Divergence Between Gold and Gold Miners

It all depends on your view on the gold price. Costs are likely to keep rising, but if the gold price rises faster, producers will be able to generate returns for shareholders.

My thesis is that in the new macro, the post-bubble macro leverage will return, and it will surprise a great many people who’ve given up on the gold mining industry ever finding that fabled positive leverage again.

Gold will not rise faster than input costs if the central bank manufactured inflation continues to benefit cyclical markets (including mining cost input, crude oil/energy). Therefore, it is more likely that gold miners will get a better fundamental benefit during a counter-cyclical environment which, if not stagflationary, would be deflationary. Either way, it would eat away at the economy and theoretically drive gold’s real price upward vs. cyclical assets and markets.

The nominal gold price should be minimized when thinking about whether or not the gold miners will finally leverage it to the positive side. It is all about the relationship of the gold price to other assets/markets. Also, I put little stock in central bank buying, because they are notoriously poor buyers (cue the BoE selling out just prior to the gold price low in 2000) and also well, you know, for every buyer… a seller’. Eh?

[edit] There is a case that central banks are buying to diversify from USD, the hegemonic king of the currency world. That is related to the “dedollarization” and BRICS independence themes. It is also quite valid, in my opinion, when viewing it from a long-term perspective. Whether that is driving the gold price in the short-term is up for debate.

So I would tweak or even disagree with some of the finer points of the article, but generally it is on track because it factors gold’s inter-market relationships, unlike many of the more mainstream sources fixated upon the nominal gold price, central banks, China buying, Indian wedding season and so on. Again, for every buyer a… Beuller?

So I personally learned little in the article, but this letter is good reference material as well because it included details on the Cannabis industry and its quest for rescheduling, if not Federal legalization. Other markets are discussed as well. It’s a handy note to receive once a week or so. Again, I remind you that SWS is the only affiliate I highlight or recommend, because it is no b/s and I use it myself. Just to be clear because I don’t want to play the game of acting like I am presenting something for non-commercial, unbiased reasons when it is actually an affiliation.

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