Gold News

Gold & Silver Miners

Gold & silver mining stocks have badly lagged the precious metals markets...

MANY GOLD & SILVER INVESTORS are very frustrated at what seems to be the poor performance of gold & silver mining stocks over the last couple of years.

   When compared to the performance of silver and Gold Prices themselves, even the Junior's have not performed to their full potential. Why not?

Gold & Silver Mining Stocks Suffer with Everything Else

   Increasing political uncertainty in the countries where some gold & silver mining companies operate has raised doubts about their profitability. Emerging nations have also sought to increase taxes and royalties paid by the gold & silver miners. This does indeed hit profit margins, so why price the high profits expected from high Gold Prices in too early?

   As doubts about the future of the US and global economy were raised in late 2007, and overall stock market indices fell after discounting a tremendously rosy future for corporate America, so gold & silver mining shares also suffered. They will continue to suffer for as long as this view is held.

   Long-term investors are usually institutions that have to produce a return for their future pensioners or clients. These returns come from capital gains (meaning rosy future capital and income expectations) and also from income. With the very high price/earnings ratios we saw in the stock markets in 2007, the emphasis has shifted almost completely away from income to capital gain.

   But now the harsh reality has become apparent – that the future is not so bright for stocks and that the dividend-flow is hopelessly low.  So the unbridled enthusiasm of former times to buy shares, including gold & silver mining companies, has dimmed tremendously.

Gold & Silver Miners Hit by Interest Rates

   Gold & silver mining stocks were also hurt by a now old-fashioned formula that started to raise its head again as we saw interest rates in the capital markets rise sharply last year.

   The relationship between overall rates of return on fixed-interest securities and on shares showed that while capital values may have fallen, the return on new money invested rose along with interest rates. But then throw in inflation – currently surging worldwide – and these rates did not look good either.

   So no wonder investors are rushing in search of new homes for their money, such as cash or short-term T-bills, rather than stock-market equities!

   Mining shares including even gold & silver producers also suffer in this change of investment climate. Overall, the lower risk of fixed investments performed as well, if not far better, than overall equities. But now toss in inflation and both begin to look poor.

   You may well now retort, "But the mines will do better than other sector equities!" And you would be right, but when?

   Take a look at what a gold or silver mine will earn from last year's silver and Gold Market, and then ask yourself what price was this based on? We are now beginning 2008, so what price will this year's income be based on?

   The company will decide earning after tax and whether or not to pay dividends based on the average price of gold or silver in the company's accounting year. It is not the Gold Price on any particular day in 2008. But investors have a tendency to assume that today's price will be the average going forward, and that the share price should therefore reflect today's gold & silver prices.

Watch the Gold Price to Track the Gold Miners

   Savvy gold & silver investors need to keep a watchful eye on the average price, not the day-to-day spot price, because it is the average which will dictate their total return.

   But as gold & silver mining investors, we must also beware falling equity markets. The rosy future is no longer in front of us, not unless we actually see hope reappear after the US government stimuli of interest rate cuts & tax stimulus have taken effect, which may be some months in coming. So we turn back to the grimy reality of income earned on our investments, which rises in importance as capital appreciation wanes.

   Look at the gold & silver miners, and ask:

  • Will the mines pay a dividend or are they extending the life of the mine at the expense of dividends?
  • Will dividends come in the future, if so when?
  • Will the mining company's policies lead to capital appreciation?

   It is total return we are after, and that varies with the investment climate and expected return on investment.

   You could reply, correctly that gold & silver mining shares have a rosy future, and they will pay rising dividends too, and so they should. (Be sure to check company policy on their website to confirm it, however!). But the real joy of the gold & silver mining stocks will come when other sector shares are looking at a dull future, while Gold Investments are not.

What makes us confident in gold & silver mining stocks if other equities look disappointing in the face of a possible global recession?

During the fall of 2008, and once equity markets have seen the worst of their drops, good investors will be looking around for shares set to behave well during and after further losses of broader stock market value. With gold & silver prices rising steadily – much faster than even the gold miners' rising costs – but still enjoying a long upwards path ahead, gold & silver mining stocks are on a path to growing income. And as the reality of the average gold & silver price rising turns into present income, so gold & silver shares will become attractive.

If the precious metals and Gold Bullion continue to evolve into a sector that is seen as a more than a volatile, speculative corner of the stock market, then – contrary to other equities – we will see gold & silver mining stocks outperform.

But before that happens, investors have to be convinced that the rising silver and Gold Price are here to stay, and that present prices of gold and silver will hold. Here at the Gold Forecaster, we believe they will!

JULIAN PHILLIPS – one half of the highly respected team at GoldForecaster.com – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

See full archive of Julian Phillips.

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