HUI, which tracks a bunch of leading gold miners, is down nearly 20% in just the past four months… and this has shaped plenty of golden deals in this sector. Most of all the big names in the Gold Markets are trading in single-digit PE ratios yielding more than 2.5%. That’s a significant discount to the S&P 500, which trades 14 times earnings and yields a meager 2%.
Did you know that in the year 2007 analysts and brokerages had down ticked gold investments with a foresight that gold price would fall intensely over the next four or five years, for instance the unanimity of all assessments was pointing to a decline of say $650 to $520 by 2012, instead, the price rose 150% to an average of $1,650.
In the same way, the prognosticators are projecting a fall from $1,650 to $1,515 by 2017. Even if they believed gold would move higher this year, the best guess is that, it is eventually headed lower. So far they’ve been wrong each time.
The obvious lesson for us, investors is to ignore price forecasts from the brokerage and major banks; they just don’t get it right. I’m sure most of you already know that, though there are bigger consequences of these facts that may not instantly come to our mind…
Now why should you as small investor buy gold miners if your analyst is telling the price of gold is going to go the way down south?
You wouldn’t, if the price of the product a company sells is likely to weaken over the next few years, you wouldn’t buy the company’s shares, as its earnings are almost sure to fall as well. As an analyst, I wouldn’t buy any asset with this kind of outlook.
Does it really matter that analysts have been consistently wrong with their prognostications? NO what really matters is the world of institutional investors that believe the likely fall in gold price and margins of the miners.
They are less likely to stick their heads out and buy gold, they wouldn’t as they could lose their jobs and bonuses, in case if the predictions come true and they are caught going against the trend.
This very well explains why institutional investors and hedge funds have not entered into gold en masse, and this could well be the reason for the disconnect between the price of gold and trajectory of gold miners.
This scenario makes me believe that their money, for the most part, is still on the sidelines.
If this is the situation why the heck is gold rising every year so here is my take? Gold is not a trading fish for institutional investors. Instead it is supported by a strong carnal demand from individuals, and widely accepted as a store of value as well, from central banks around the world.
While this phenomenon gives me an intuition that one fine day these self-same institutional investors will come back en masse after they are convinced of the sustainable uptrend (say $1,900 isn’t a momentary freak).
I am still not sure of what price the precious metal would have to sustain or how long it would have to stay there before the skeptics jump on board, but I am pretty sure they are not gonna be the first to the party.
And I swear whenever this happens there is gonna be stampede in this tiny industry, and it will be sudden and dramatic as they tend to have a herd mentality.
The consequence will result in radically higher prices, for instance Newmont Mining (NEM), based on its Reserves, would be about $200/share and it is now trading in the range of $45)..And so will be other Gold miners that I have discussed such as Barrick Gold Corp and Rand Gold Resources.
That makes me excited about the miners since this has always been the first place the institutional world will turn to when gold makes a persistent up move.
And that day you will hear musings that, bonds are no safe place for money and inflation is going to go out of control, blah blah, and you will see them flood our tiny market pushing gold miners by a great order of scale.
When this change gets under way, you would already own the shares that these big sharks will be screaming to buy. May be you should thank them now.
I appreciate you sticking with me this long, the current risk-versus-reward circumstance concerning investment in Gold Miners is a setup I like to perceive… You have incredible upside potential.
Disclosure: I don’t have any positions in any gold miner mentioned herein, and no plans to initiate any in the near future as well.
I always welcome any corrective suggestions to improve this review, simply click ‘Suggest Corrections’ to hook up with me, I will update accordingly.