By Bob Hoye
Mines & Metals: Global Perspective
By Bob Hoye
If you are speculating in gold-mining stocks it is important to have your eyes wide open and to not be hoodwinked by the pundits who argue that the current low prices for these stocks imply extremely good value. The fact is that at the current gold price not a single senior gold-mining company is under-valued based on traditional valuation standards such as price/earnings and price/free-cash-flow. Also, while some junior gold-mining companies are very under-valued, most are not. In other words, the low price of the average gold-mining stock is not a stock-market anomaly; it’s an accurate reflection of the performance of the underlying business.
The relatively poor operational performance of the gold-mining industry is not something new. It is not something that has just emerged over the past few years or even over the past two decades, meaning that it can’t be explained by, for example, the advent of ETFs (the gold and gold-mining ETFs actually boosted the prices of both gold and the stocks owned by the ETFs during 2004-2011). The cold, hard reality is that with the exception of the banking industry, which usually gets bailed out once per decade at the expense of the rest of the economy, since 1970 the gold-mining industry has wasted capital at a faster pace than any other industry. That’s why the gold-mining-stock/gold-bullion ratio is in a multi-generational decline that shows no sign of reversing.
It’s certainly true that a lot of money can be made via the judicious speculative buying of stocks in the gold-mining sector, because these stocks periodically generate massive gains. It’s just that in real terms (relative to gold) they end up giving back all of these gains and then some.
There is so much data flying around out there. From the Credit data we reviewed yesterday to weakening manufacturing and exports to employment up nicely one month and down big the next, to frisky consumers (the economy’s ‘back end’, putting it nicely) out there confidently living it up.
Big pictures help us let it all simmer and take out the noise. Here is a big picture for you… and it is an unchanged story; America has eaten its financial seed corn (replacing it with the soft meal known as credit) and financial market analysis is now in the hands of data freaks parsing and quantifying every little twitch on short time frames to draw conclusions and extrapolations based on little more than a black hole (that would be debt).
Here is the 10 year yield (blue shaded area) pinned down for decades by our ‘Continuum’ indicator, the monthly EMA 100 along with the 2 year yield (orange).
As often noted to NFTRH subscribers, I believe now is a good time for swing trading. Not day trading (whipsaw) and not investment (other than maybe a few items I’d consider investment worthy for my own reasons, largely stemming from my originally coming from the productive economy, not the financialized one).
Swing trading is defined here as the act of taking positions on downside buying opportunities and holding through some ups and down and then forcing myself to take profits when they are presented. In 2015, for some reason they have been presented with great regularity. I am not sure why, other than I did improve my own focus as a trader and decided to stop burning so many commissions.
I bought Intel on its big drop and decided to hold into earnings. That’s often a tough call. Today it’s up in AH after meeting expectations.
Then there are the Biotech/Specialty Pharmas. We have been following the index and the sector ETF, advising that until the trend is broken the trend is not broken.
Still, I decided to take profit on this one again after buying the recent plunge.
I decided to continue holding this one despite today’s 10%+. The chart and some light fundamental study (but it’s a spec. Bio!) kept me holding.
Well, the knock down in the 30yr-5yr yield spread did not last long. While it has not done anything it didn’t already do before ultimately failing in October and January, it bears watching.
The nominal 10yr is down…
And the nominal 2yr is down by more…
So this spread is rising from yesterday’s close per the following…
This is stuff you won’t find on Bubble Vision or maybe in your CFA’s monthly report. But it is only critical to most markets. The state of nominal yields dropping while curves rise would be a tail wind for gold, and for the stock market? Not so much. Yet neither of these mostly opposed asset classes have reacted yet. That is because… this:
Major trends have not changed yet. Patience my friends.
[biiwii comment]: 3 posts, all by guests. Some Mondays I am all talked out after an NFTRH report, and just enjoy decompressing. The weather is great, the market has been good thus far in 2015 and well, it’s a day by day thing. As to EWI’s theme here, it makes no difference to me… bubble, no bubble, bubble growing, bubble popping… the theme continues to be trade what you see, not what your ego or hopes and dreams see… and take profits and manage risk along the way. And for crying out loud stop reading people who micro manage gold in a vacuum as if it’s the only market on earth. They call that agenda.
Editor’s note: This article is from Elliott Wave International’s brand-new investment report, “U.S. Investors Face a Giant, Historic Bubble.” It originally appeared in the April issue of The Elliott Wave Financial Forecast, published March 27, 2015. For a limited-time, EWI has agreed to give our readers exclusive free access to the full report. Please click here to read it now.
In March, we covered the return to a popular fascination with technology.
The striking resemblance to 2000’s technology mania is not going unnoticed. How can it? With the NASDAQ’s much heralded return to 5000 and magazine covers proclaiming “Google Wants You To Live Forever,” concern about an “asset bubble” is being raised. But this is actually another throwback to early March 2000, when the NASDAQ reached its all-time high and the Financial Forecast remarked on a “public ambivalence toward warnings of any kind.”
The effects of a strong US currency are vast. Much of what is being reported in main stream media are the negative domestic effects. A wider view shows some positive evolving trends as well.
Yes, a higher US dollar has killed oil prices. This has lead to lower broad Index earnings and earnings expectations which is highly concentrated in the energy sector. A higher dollar also hurts foreign earnings of US companies. And, it appears to have abetted a lull in US manufacturing in Q1. Let’s hope the pace of dollar appreciates abates and that these negatives subside.
Even the most well-meaning and rigorous attempt to come up with a single number (a price index) that reflects the change in the purchasing power (PP) of money is bound to fail. The main reason is that disparate items cannot be added together and/or averaged to arrive at a sensible result. For example, in one transaction a dollar might buy one potato, in another transaction it might buy 1/30,000 of a new car and in a third transaction it might buy 1/200 of a medical checkup. What’s the average of one potato, one-thirty-thousandth of a new car and one-two-hundredth of a medical checkup? The creators of price indices claim to know the answer, but obviously there is no sensible answer. However, in this post I’m going to ignore the conceptual problem with price indices and briefly explore the question: Which is probably closer to reality — the official CPI or the CPI calculated by Shadowstats.com?
Enjoyable to write and of personal benefit in focusing my thoughts, NFTRH 338 was emailed to subscribers this morning. It includes an extended look at GE’s move to get out of the finance business and focus on manufacturing (in particular, automation and robotics). We take it further and correlated GE’s move to what the Swiss National Bank did a few months ago.
Oh and there was lots more as we covered stock markets, precious metals, commodities and got into some interesting currency conversation. A really good report this week.
Last October I wrote a piece that explained why gold mining had been such a crappy business since around 1970 and why it was destined to remain so as long as the current monetary system was in place. The explanation revolved around a boom-bust cycle and the associated mal-investment linked to the monetary machinations of central banks.
The crux of the matter is that when the financial/banking system appears to be in trouble or it is widely feared that central banks are playing fast and loose with the official money, the stock and bond markets are perceived to be less attractive and gold-related investments are perceived to be more attractive. However, gold to the stock and bond markets is like an ant to an elephant, so the aforementioned shift in investment demand results in far more money making its way towards the gold-mining industry than can be used efficiently. Geology exacerbates the difficulty of putting the money to work efficiently, in that gold mines typically aren’t as scalable as, for example, base-metal mines or oil-sands operations.