Paraphrasing Winston Churchill, gold is a “riddle, wrapped up in a mystery inside an enigma”, at least as far as I am concerned. I don’t understand what moves the gold price and I have never held gold in my portfolio. That does not mean, however, that I am not fascinated by the price of gold and immune from its movements. That was brought home last week, when the price of gold dropped by 9% on April 15, 2013, the biggest one day drop in thirty years. Not only did the prices of other precious metals (silver dropped 12%) and industrial metals drop, but stock prices took a tumble as well. While the attention has focused on the price drop in recent days, gold has had a good run over the last decade.
The nominal and inflation-adjusted prices of gold have soared in the last decade, and at the end of 2012, the nominal price was at an all time high of 1664 and the inflation-adjusted price was close to its previous high set at the end of the 1970s. The big question that has been debated in recent days is whether gold will continue to drop in the coming days. More generally, is gold is under or over priced? With my limited understanding of gold, I decided to give it a shot.
Does gold have an intrinsic or fundamental value?
The intrinsic value of an asset is a function of its expected cash flows, growth and risk. Since gold is a non cash-flow generating asset, I argued in this earlier blog post that you cannot estimate an intrinsic value for gold. It is the same argument I would make about all collectibles: Picassos, baseball cards or Tiffany lamps included. If one of the central tenets of value investing is that you should never invest in an asset without estimating its value, that would seem to rule out gold as an investment for a classic value investor. In fact, Warren Buffett has repeatedly argued against investing in gold because it’s value cannot be estimated.
Most will not be familiar with West Australian gold exploration company Evolution Mining.
It distinguished itself on Tuesday morning by being the worst performing stock in the over $500 million market capitalisation category on the Australian Securities Exchange. Its share price fell almost 18 per cent when trading opened.
It underperformed a bunch of other relative unknowns such as Silver Lake Resources, Medusa Mining and Regis Resources.
All these stocks and many other gold hopefuls were trashed on the market as gold aversion fever took an even tighter grip.The real punters trawl the market for these kinds of stocks. They represent an opportunity to make great capital gains if one gets in at the right price. Hopefuls such as these are the first to fall and experience the hardest hits if prices move against them.
While there are larger gold stocks in Australia, such as Newcrest and PanAust that have also fallen victim to the gold price toppling over a cliff, they are more established and will be better placed to ride out the price rout.
Putting aside the extraordinary events of the past couple of days, investors in gold producing stocks have not had the huge gains that have been experienced by direct investors in gold. But they have been feeling the knock-on effects of the tumbling gold price.
Analysts are now having to revise their numbers on the gold miners and their projects to ascertain which can make a decent return on lower cash flows after factoring in a plunging gold price.
This all makes perfect sense. Certainly it makes more sense than the crash in the gold price, which has fallen to a series of disparate triggers. The fall is as much about sentiment as anything else.
What is more confusing (but more important to Australian investors) is the contagion effect the gold price fall has on other mining and energy companies.
It’s one thing for precious metals to move into a fog but it’s another to have mining companies that don’t produce them follow suit.
Some slightly softer growth numbers out of China won’t have helped big mining companies but the iron ore price is holding firm at $US140 a tonne and the oil price is not retreating rapidly.
But the even large miners such as BHP Billiton and Rio Tinto have been victims of the gold slump.
Regardless of whether it is hedge funds covering gold bets or an overreaction to China, the fact is that Australia’s mining sector is particularly sensitive to changes in commodity pricing and sentiment.
Environmentalists failed in their attempt Wednesday to force the cleanup of several long-dormant uranium mines on the Western Slope.
Decades ago, Colorado’s uranium belt north of Dove Creek and west of Telluride provided high-paying jobs and much of the fuel for the country’s early nuclear-weapons arsenal. But the mines have been mostly shuttered since the early 1980s, with only brief production from a few mines from 2004 to 2006.Activists at the Information Network for Responsible Mining say it’s time to clean them. They targeted two companies – Cotter Corp. and Energy Fuels – to ask state mining regulators to deny them permission to put their mines on a five-year inactive status.But the Mined Land Reclamation Board voted 4-2 Wednesday to allow the companies to go on inactive status, which means they will not have to commence cleanup.Jeff Parsons, a lawyer for INFORM, argued that state law says “in no case” should a mine be allowed to sit dormant for more than 10 years before it has to lose its permit and begin cleanup. Cotter owns four mines that have not produced ore since about 1981, company officials testified Wednesday.“The fact that they’ve been given this exceedingly generous 30-year gap needs to end,” Parsons said.
Parsons argued that state mining regulators have been getting it wrong for decades by letting mining companies maintain their permits even though they aren’t producing ore.
Members of the mining board conceded that Parsons might have a point, but they didn’t want to revoke permits that the state had granted and has honored for years.
“I think to retroactively go back and pull the rug out would be very damaging to their people,” said Tom Brubaker, a member of the mining board.
INFORM now has the option to sue the mining board, but Parsons said it’s too early to say if his group will go to court.
A federal judge’s order has blocked all uranium mining in Southwest Colorado since 2011, when he found the government didn’t properly study the environmental effects of leasing public lands to uranium companies.INFORM pressured state mining regulators to tell uranium companies that they need to put their mines on inactive status, known as temporary cessation, because mining hasn’t occurred for more than a year.
INFORM then asked the mining board to deny the temporary cessation permits for Cotter and backdate them for Energy Fuels, which would have the effect of forcing the mines to begin cleanup sooner.