The Myth of Gold Stock Leverage

By Steve Saville

A few years ago I wrote a couple of pieces explaining why gold mining is a crappy business. The main reason is the malinvestment that periodically afflicts the industry due to the boom-bust cycle caused by monetary inflation.

To recap, when the financial/banking system appears to be in trouble and/or economic confidence is on the decline, the perceived value of equities and corporate bonds decreases and the perceived value of gold-related investments increases. 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.

In the same way that the malinvestment fostered by the creation of money out of nothing causes entire economies to progress more slowly than they should or go backwards if the inflation is rapid enough, the bad investment decisions fostered by the periodic floods of money towards gold mining have made the industry inefficient. That is, just as the busts that follow the central-bank-sponsored economic booms tend to wipe out all or most of the gains made during the booms, the gold-mining industry experiences a boom-bust cycle of its own with even worse results. The difference is that the booms in gold mining roughly coincide with the busts in the broad economy.

Continue reading The Myth of Gold Stock Leverage

Trading in GDX is Weird

By Otto Rock

I stuck this on the Twittermachine Friday evening, after the normal end-week data dump had filled my XLS charts.

You’re not supposed to get much comeback from a wonky financials post on a Friday evening but from the number of RTs and Likes, it’s not just me that thinks this is odd. Text of Tweet here:

Something bizarre: The last 7 WEEKLY closes of $GDX are:

May 18th: $22.19
May 25th: $22.31
June 1st: $22.31
June 8th: $22.36
June 15th: $22.23
June: 22nd: $22.18
June 29th: $22.31 A spread of 18c?

A 0.8% max variation over 7 weeks? 3 closes out of 7 at exactly $22.31? WTF?

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