Gold News

Greed, Fear & Gold Mining Stocks

Mines can't just pause production on low prices...
The GOLD-SECTOR has always had a boom-and-bust mentality, according to Ron Stewart, P.Geo., of Macquarie Equity Research.
The flip side to the bear market is that the next bull market will produce phenomenal gains, he believes.
Formerly executive vice president at Dundee Securities, CEO of Belo Sun Mining and senior vice president of exploration at Kinross Gold, Stewart has over three decades of experience in the mining industry and is currently a research analyst of metals and mining with Macquarie Equity Research in Toronto.
Here he speaks with The Gold Report about finding low-cost, high-grade miners, several of which are likely to excite interest from cashed-up suitors...
The Gold Report: There was a widespread assumption in 2011 that the price of gold could only go higher. As we have seen, this assumption was very much mistaken. Today the mood is much more pessimistic. Could this pessimism be just as mistaken as the optimism was?
Ron Stewart: Yes, it could, but it's my experience that markets tend to overshoot on the upside and downside alike.
TGR: Why has gold lost so much value?
Ron Stewart: Several reasons. Gold tends to rise in times of high inflation, and inflation is pretty low right now. The US economy is doing well compared to other countries, and gold has a negative correlation with the US Dollar. Money is flowing into the US economy and to the US Dollar and exiting other instruments such as gold.
TGR: What do you make of the argument that financial institutions such as Goldman Sachs are using shorts to beat down the gold price?
Ron Stewart: It's really hard to point a finger at any one institution or entity that could drive the gold price one way or another. There are so many factors in play. For example, Russia now has the fifth-largest central bank holding of gold and continues to accumulate it. Should Russia become sufficiently distressed economically and need to acquire foreign currencies, it might become a gold seller.
It's important to remember that the gold sector is a relatively small one in the global economy, and so its volatility is exacerbated as a consequence.
TGR: How long will the price of gold remain depressed?
Ron Stewart: The last time the gold and gold mining sectors were so out of favor lasted from roughly 1998 to 2002. We're now two to three years into the current bear market. How long will it last? That's the $64,000 question.
TGR: In 2008, economic shocks led to rapid gold appreciation. Do similar conditions exist today?
Ron Stewart: The situation today is considerably different than in 2008. Back then, several major banks were on the brink of collapse, and the markets were basically frozen almost overnight. Today, we have a weak European economy and a slowdown in China. But I don't consider another almost catastrophic failure in the financial system to be imminent.
TGR: What are your near- and longer-term predictions for the price of gold?
Ron Stewart: In the near term, we're looking at a range of $1150 to $1300 per ounce. Could it go lower? Yes. Over the next three to five years, we see the opportunity for a constructive price increase.
TGR: The Gold Report interviewed Oliver Gross in October, and he told us that all-in sustaining costs for gold producers are now above $1150 per ounce and that increased production will require a gold price of at least $1400. That being the case, doesn't it suggest that absent a significant rise in the gold price many mines will become marginal or will be shuttered?
Ron Stewart: We are seeing some margin squeeze at the top end, but the recent fall in the oil price helps miners by reducing operating costs. More important, any analysis based on the US Dollar price of gold fails to consider the local impact of different currencies. For instance, if one considers the Canadian or Australian Dollar, the gold price fall in these currencies hasn't been as dramatic, and so Canadian and Australian operations haven't been squeezed quite as badly as operations priced purely in US Dollar terms.
Mines don't shut simply because they are losing money in the short term. Mines are long-term investments, and their owners have taken and will take steps to further reduce costs.
TGR: Toward the end of last year, hundreds of precious metals stocks reached 52-week lows. Will investors consider this a buying opportunity?
Ron Stewart: Buying and selling are individual decisions, so it's hard to make sweeping predictions. Investors who take the long view should consider Warren Buffett's advice: Be fearful when other investors are greedy and greedy when other investors are fearful.
TGR: Investors in gold companies are fearful, so what are the critical factors they should consider before buying shares?
Ron Stewart: We look for good management teams, good balance sheets and projects that are not highly leveraged. Investors should also take care to choose stocks that have sufficient liquidity to allow them to get out, should circumstances change or they change their minds.
TGR: Which junior gold producers today are your favorites and why?
Ron Stewart: We like smaller Canadian producers because of the currency advantage I mentioned above.
TGR: What reasons do precious metals investors have to be cheerful?
Ron Stewart: Investors really have to look at their timelines and determine what's motivating them to put money into any sector and when. Certainly anyone who's been invested in precious metals over the last three years is feeling a lot of pain right now. I understand that, but going back to the famous Warren Buffett quote, fear has become dominant across the entire materials spectrum: gold, silver, copper, iron ore, etc. But the world is not going to stop needing metals.
There are good places to invest, if you have the patience and fortitude to ride out the downturn. When the next bull market begins, returns will be phenomenal. When that's going to happen I leave to a higher authority.
TGR: Ron, thank for your time and your insights.

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