LAWRIE WILLIAMS: Easter reflections - Rising gold price inevitable
This Easter weekend heralds the end of the first quarter of the current year and gives us time to reflect on the performance of the gold price and gold equities so far – or perhaps that should be non-performance after a promising start to the year. Gold itself is marginally above where it was at the beginning of 2018, while gold equities are generally lower which is particularly disappointing for a sector which is now much more bottom-line oriented. Silver and platinum prices are lower too. This followed on from several years of profligacy where for many companies the mantra appeared to be gold production growth at any cost. That led to investment in hugely expensive capital projects at the expense of free cash flow, and a seemingly total lack of cost control – a process which only started to be reversed due largely to institutional shareholder pressure, along with the gold price downturn from its peak in late 2011. As a consequence the major gold equity indices have fallen around 65-70% from their 2011 peaks, while the gold price itself is only down around half of this.
With the gold mining companies in general improving their profitabilities this represents a serious change in sentiment by the investing public. To an extent the gold equities have lost traction as investments due to the very strong performance of the general equity markets which have seen almost unbroken gains since their 2009 lows which has made gold equities less popular as investments – why buy into a falling market when the main stock indices continue to rise? But will the stutters in the overall equities indices of late, amidst many dire predictions of a massive crash, gain in credibility and drive investment back into gold and gold stocks?
I am indebted to Martin Murenbeeld – www.murenbeeld.com , one of the more circumspect and accurate of the many gold economists/commentators around, for his views as expressed in his latest Gold Monitor newsletter. Martin is a believer in gold – indeed he sees a rising gold price in US dollars as inevitable given the prospect of ever increasing debt, rising interest rates making the servicing of the debt even more expensive, coupled with falling U.S. tax revenues under the latest Trump initiatives. He is not a $5,000 or $10,000 short to medium term gold price predictor, but does see a steady rise ahead – a view which this writer largely supports.
As Martin notes in his latest newsletter – “We are bullish on the gold price, which readers must know, so we are not concerned by these periodic pullbacks in the price. From our perspective there are a number of medium/long-term factors that will inevitably, in our view, lead to significantly higher gold prices.” (Note: the Murenbeeld view of ‘significantly’ may be rather less indicative than that of other utilisers of the term – he is basically a ‘cautious gold price bull’!)
But what of the likely impact on gold bullion and on gold stocks? As Murenbeeld states, the likely effect on the gold price itself is positive – and almost growing more so by the day. But will the gold equities follow suit – something they have signally failed to do since the gold price started to turn upwards a couple of years ago?
His views on this are indeed positive also for the gold miners, although such a reversal in trend may take a little time yet to become apparent. Anti-gold equity sentiment has become more deep rooted given their exceedingly poor performance since gold’s 2011 peak.
He feels that much of this jaded opinion of the major gold producers is now perhaps being belatedly understood by the miners, and he and his analytical team do believe that the miners are at least beginning to address investor demands. He feels that they now recognise that there is competition in the gold space – equities vs bullion - and sense that management is working on making equities at least, if not more, attractive to investors than raw bullion as had been the case in the past.
But overall any upturn in gold equities has to stem from gold price performance, which would then filter through in terms of increased earnings and, hopefully from the investor standpoint an increase in dividend payments in real terms –something most of the production growth-at-any-cost gold majors seem to have been reluctant to implement in the past preferring rather to plough back any surplus profits into their expansion plans.
Shorter term gold bullion – and indeed silver given the gold:silver ratio remains above 81 which in many analysts’ views make silver the better buy (an opinion with which we would not argue)- in terms of physical metal, or even ETFs, may still be the better investment, but as the miners’ profitabilities improve and if they start upping dividend payments as a result, a switch into gold equities may well be worthwhile. General equities are looking vulnerable to further falls and bitcoin seems to be heading towards the 6,000s and below. Better avoided for the moment.
31 Mar 2018