Professor’s Comments A Few More Thoughts 2/27/17

Posted by OMS  at February 27th, 2017

Whenever a few gold stocks or ETFs start to appear on the Dean’s List, I always get a few emails from students concerned about their gold holdings.  They watch the price of gold (the metal) starting to move up, but many times the gold stocks they’re holding do not move up with it.  They get concerned.

So today, I want to take a few minutes to review the difference between gold (the metal) and gold mining stocks.

As I’ve said many times before, the difference between gold and the miners is huge.  If you buy GLD, which is an ETF that owns physical gold, you basically own shares of the metal.  If you buy GDX, you own shares of an ETF with a lot of gold miners in it.  One (GLD) represents gold above the ground; the other (GDX) represents gold still in the ground.  A lot of work needs to be done to get gold from the mine into bar form.  And a lot can happen in the process.

The first thing students need to realize is that most gold miners do NOT own any gold.  They own (or sometimes rent) mining equipment.  So, when you buy a gold miner, or an ETF that has miners in its portfolio, you don’t own any gold.  Gold miners don’t have a pile of gold stored out back or in a vault somewhere.  That’s because they sell all their gold as soon as they get it out of the ground.  They use the money to support the mining operation.  Most times, when the price of gold is moving up, the price of gold mining companies moves up with it, because they can sell their gold at higher prices.  But let’s say that a critical piece of equipment breaks down and the company produces less gold that month.  Even though the price of gold is moving up, the company will probably lose money, which in turn will negatively impact its stock price.

Other things can also happen with mining companies, like management issues, strikes, fires, earthquakes, etc.   I once owned a stock called Anglo American Gold (AEM) in 2011 when gold (the metal) was rallying.  But AEM, which was a great mining company for the previous 4-5 years had a fire in one of their mines.  The fire shut down the mine, which caused the stock price to be cut in half…..while gold was rallying!  This is one of the reasons why I prefer to use ETFs when I trade gold.  ETFs have several mining companies in their portfolio, so if one company has a problem, it only has a small impact on the overall portfolio.

The other thing you need to know about gold mining companies is that they’re not cheap!  A company like AngloGold Ashanti Limited(AU) has a trailing P/E ratio of 43.  Others like Newmont Mining (NEM) have negative P/E ratios, which means they are currently not making any money.  If you compare a typical gold mining company with a typical oil driller, the gold mining company is usually priced 2-3 times higher in terms of P/E ratios. Yet both companies are basically in the same business.  One is mining gold, the other is mining (drilling) oil.  They both use similar equipment and employ men with dirty faces and construction hats.  Neither has a pile of their mined product stacked out back, yet one company… just because of what it mines, is priced 2-3 times higher than the other.  Go figure.

Anyhow, I believe that gold (the metal) is getting ready to start a long term Up Trend, and ETFs like GDX should move up with it.  But right now, the 50-day moving average on GLD has still not crossed above the 200, and until this happens, gold stocks and ETFs like GDX will likely mark time forming their wave 2 ‘Blades’.  With most investors still focused on the Dow and equities, I fully expect gold and mining stocks to consolidate for a bit longer.  But once investors start to realize they’re paying historically high, nosebleed prices (Shiller P/E of 29.34 on the S&P) for stocks, you’ll see stocks prices start to come down.  That’s when I believe gold (and the miners) will shine.

I’ve been talking about the possibility of a major market turn occurring in mid-March.  This could be when investors start to pull money out of stocks and look for safe havens, like Bonds and gold.  It’s one of the reasons I talked about Bonds, the Dollar, equities, and gold in my WSR this weekend.

Hope this helps.

h

One hour video recorded from May 28, 2016 The Professor’s Signs of a Major Market Turn – Prospectives and the Projected Timing and Levels One hour streaming video – includes webinar handouts The Professor usually holds an update class whenever the Market looks like it may be making a major turn. If you have been following the Professor’s Comments you know that a turn is due….. LEARN MORE

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