New gold rush

A woman selects necklaces at a gold shop in Chinatown yesterday. People flocked to buy gold after the price dropped to below Bt18,000 per baht weight (about 15 grams)

Savers nationwide are flocking to gold shops, enticed by the falling price of the precious metal, which yesterday tumbled to a 34-month low amid fears of an end to the US quantitative easing policy.

Gold bar fell below Bt18,000 per baht weight for the first time since April 2010.

Wisawa Wisawachaiwat, the owner of Jongluck Gold Shop in Phitsanulok, said the recent plunge had sparked new interest among small savers. “The prices have fallen to the lowest in years and they are expecting huge profits once the prices climb up again,” he said. Some clients took home gold bars worth 50-100 in baht weight.

The precious metal yesterday extended the decline to a 34-month low amid speculation that the US Federal Reserve will reduce stimulus with economic data beating estimates. Held as a safe bet against inflation, gold lost value as unprecedented money printing by central banks around the world failed to spur inflation.

A lack of accelerating inflation and concerns about the strength of the global economy is also hurting silver, platinum and palladium, which are used more in industry.

Bullion has slid 28 per cent this year, set for the biggest annual drop since 1981, after rallying for the past 12 years. About US$62.4 billion was wiped off the value of precious metals exchange-traded product holdings this year as some investors lost faith in them as a store of value.

While gold bullion slid to $1,180.50 an ounce early yesterday in Singapore, the lowest since August 2010, gold prices in Thailand followed the move. Local gold prices were adjusted 15 times yesterday in line with global volatility. At 5pm, gold bar was sold at Bt17,850 while ornaments were at Bt18,250 per baht weight.

Local gold price averaged Bt17,493.18 in April, 2010, when global prices averaged $1,145.72 per ounce and when the baht was at 32.29 to the US dollar.

Jitti Tangsitpakdi, president of Gold Traders’ Association of Thailand, believed that gold prices could decline further but would not fall below $1,100 per ounce. Cheap prices should spur new demand and the local prices could be cheaper if the baht does not weaken further against the US dollar.

Christin Tuxen, a senior analyst at Danske Bank in Copenhagen, who sees gold at $1,000 in three months, said: “The current environment is a fundamentally poisonous one for the yellow metal. Rising yields are upping the opportunity cost of holding gold, the initiation of a fundamental dollar up-trend weighs, inflation expectations are in decline as the commodities super-cycle wears off, and many tail risks have been sidelined.”

Investors sold 583.2 tonnes of gold this year.

“There’re still people who are interested in gold but because prices have fallen so much and so rapidly, they’ll wait for some stabilisation,” said Alexandra Knight, an economist at National Australia Bank. “There’s definitely been a loss of confidence in gold and that’s seen in the ETF liquidations.”


Gold Fields And Other Gold Stocks Being Accumulated By Gold Sector-Focused Funds

In a recent article, we discussed the large-cap gold stocks being sold by gold sector-focused funds. In this article, we present three mid-cap gold mining stocks that are being bought and two being sold by gold sector-focused funds, such as Sprott, Tocqueville and five others, in the latest quarter. The buys are particularly notable given the steep decline in both the price of gold and the price of the average gold stock, as represented by the Market Vectors Gold Miners ETF (GDX), that are down 27% and 44% respectively below the highs set last fall. Overall, gold funds collectively or in consensus sold $281 million in Q1 from their $7.85 billion position in the prior quarter.

Gold Fields Ltd. Adr (GFI), a South African mining holding company engaged in the exploration and extraction of gold in South Africa, Ghana, Australia and Peru, has figured among the top buys by gold sector-focused hedge and mutual fund managers for about four quarters now, since Q2/2012. In the latest quarter, gold-focused funds added a net $26.60 million shares, buying 5.02 million shares and selling none, to their $211.9 million prior-quarter position in the company. In the last four quarters, these gold funds have added 14.92 million shares to their 30.08 million share combined position in GFI at the end of Q2/2012. Besides gold-focused funds, 79 guru and 27 mega sector funds also collectively or in consensus added 0.67 million and 1.89 million shares in GFI in the latest quarter. Also, 57 billionaires and billionaire fund managers together added 0.27 million shares of GFI in the latest quarter.

In its latest March 2013 quarter, GFI missed earnings estimates, reporting 9 cents versus the 12 cents analyst estimate. Its notional cash expenditure (NCE), which is a measure of the true cost of producing an ounce of gold, declined from $1,355 per oz. to $1,291 per oz. The decline was on account of an 8% decline in net operating costs and reduced capital expenditures, partially offset by an 11% decline in production from 534,000 oz. in the December quarter to 477,000 oz. in the March quarter. Its shares trade at 7.0 times forward earnings, a steep discount to the 16.3 average for its peers in the gold mining group, while earnings are projected to rise from 50 cents in FY 2012 to 76 cents in FY 2014. GFI also has a dividend yield of 4.9% compared with the 0.9% average for its peers’ stocks (based on financial data from Furthermore, it also trades at 0.8 times book, 0.9 times sales, and 3.0 times cash flow versus averages of 1.1, 10.6 and 6.5 respectively for its peers in the gold mining group.

We believe that GFI is an attractive buy at current levels based on its discount valuation, high dividend yield, and it being a favorite among leading fund managers, including gold-focused fund managers. Furthermore, with gold prices fast approaching levels equal to the sustainable cash costs of many producers, the consequent plunge in profits is bound to drive lower capitalization producers out of the market. While GFI‘s sustainable cash costs are slightly above the average for gold companies, it does have $600 million in cash, which should provide it with protection if times get tougher in the gold mining industry. Also, in that event, it could even use its cash pile to acquire marginal lower-cost producers and improve its competitive position ahead of an eventual rebound in gold prices.

Besides GFI, precious metals sector-focused investors also collectively or in consensus bought the following two mid-cap gold mining stocks (see table below):

(click to enlarge)

  • Compania de Minas Buenaventura (BVN), a Lima, Peru-based precious metals mining company, engaged in the acquisition, exploration and development of gold and silver mines in Peru, in which gold sector-focused funds together added a net 0.93 million shares or $14.9 million to their 14.06 million share prior quarter position in the company.
  • Agnico Eagle Mines Ltd. (AEM), a Canadian company engaged in the production, development and exploration of gold in Canada, U.S., Finland and Mexico, in which gold sector-focused funds together added a net 0.54 million shares or $14.6 million to their 9.94 million share prior-quarter position in the company.

Also, precious metals sector-focused investors collectively or in consensus sold the following two mid-cap gold mining stocks (see table above):

  • Randgold Resources ADR (GOLD), that is engaged in the exploration and development of gold properties primarily in Mali and Cote D’Ivoire, in which gold sector-focused funds together cut a net 0.51 million shares or $34.2 million from their 8.13 million share prior-quarter position in the company.
  • Yamana Gold Inc. (AUY), a Canadian company engaged in the exploration and development of gold properties in South America and Mexico, in which gold sector-focused funds together cut a net 1.83 million shares or $17.3 million from their 37.05 million share prior-quarter position in the company.

With the average gold stock as represented by the Market Vectors Gold Miners ETF (GDX) currently at multi-year lows, the time may be approaching for adding high-ranked gold mining stocks to a well-diversified portfolio. While bears currently rule the gold market, and it is likely that it may continue a bit further as it is one of the few areas of the market where bears have had any success lately, the current trend is bound to end soon. At sub-$1,300 prices, gold is fast approaching levels equal to the sustainable cash costs of many producers. As profits plunge and maybe even go into negative territory, it will drive some of the lower capitalization smaller producers out of the market, thereby paving the way for lower supply and higher prices going forward.

We believe that knowledge of how the best minds in the investment community, in the form of guru, mega and gold sector-focused fund managers, are collectively positioning themselves can help us pick the best stocks to add to our portfolio. We have observed predictive power in the moves of leading fund managers on stock prices going forward, some of which are documented in our earlier articles on Q4/2012 small-cap biotech picks by guru funds and Q1/2013 top telecom equipment picks by guru funds.

General Methodology and Background Information: The latest available institutional 13-F filings of 128 sector-focused hedge fund and mutual fund managers, including seven focused on precious metals, were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These sector-focused fund managers allocate most or all of their resources to their sector of specialization, and the argument is that they have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When these sector-focused fund managers invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.

This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.

Credit: Fundamental data in this article were based on SEC filings, Zacks Investment Research, Thomson Reuters and The information and data is believed to be accurate, but no guarantees or representations are made.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Business Relationship Disclosure: The article has been written by the Hedge and Mutual Fund Analyst at is not receiving compensation for it (other than from Seeking Alpha). has no business relationship with any company whose stock is mentioned in this article.


Falling Prices Not End Of The World

Just when we thought things couldn’t get any worse for the miners, Ben Bernanke throws a ball at the dunk tank. On Thursday, after Bernanke signaled that the Fed may soon start turning down the printing presses, global markets across multiple sectors have sold off their holdings – most noticeably in the mining sector. Gold finished off the day down 7%, about $95 to $1,278 an ounce – the lowest level in 2.5 years and well below the psychological resistance point of $1,300 – and silver was off by even more than 7%. This article discusses the significance of the day and why investors should prepare for more falling precious metals prices.

Gold has declined almost 17 percent since mid-April driven by a benign global inflationary environment. Today, after Ben Bernanke‘s comments that U.S. bond buying could be slowed later this year, the appeal of Gold as a hedge against inflation has lessened significantly.

Gold Prices Headed Lower

Back in April I warned investors that Gold prices could fall to $900/oz by early 2014 and it looks like it will be headed in that direction. On April 15, a sharp fall in gold prices led to the Chinese buying 300 tons of gold-more than a third of the gold China purchased in all of 2012 – which helped the price of gold recover from that fall. The drop on Thursday was much greater and I don’t think the retail demand from China can help gold prices recover this time (not to mention the weak industrial demand coming from China and India as a result of economic slowdowns).

For those of you who regularly read my articles, you know I normally formulate investment decisions based on fundamental analysis. However, the technical chart below (200-week moving average) derived from Yahoo Finance figures reveals an interesting trend that investors should keep a close eye on.

Source: Yahoo Finance

If you had bought gold at the bottom of that 200-week moving average back in 2011 (at the white circle), you would have made a 600% return on investment. We now broke below the 200-week moving average, back in April (at the red circle), for the first time in over a decade. Again, I’m not much of a technical wizard, but this chart clearly shows the downward momentum that is pulling on Gold prices. In this market environment that we find ourselves in, momentum seems to play a huge part on stock rallies (take a look at virtually every single resource-based stock and technology stock).

Prices Could Fall Below $1,000

By the end 2013, I think gold prices are headed down towards $1,200-$1,100 an ounce (on the upside). In the downside scenario, prices could break below the $1,000 psychological resistance point. Having said that, I don’t think that is the end of the world for miners. Average production cost of gold worldwide is about $1,200 an ounce, therefore at spot prices of $1,200 about 10% of the world’s gold producers will enter a loss-making threshold. If spot prices fall to the $1,100 level, around 44% of the world’s gold producers will be operating at a loss. On the upside, some of the best gold miners in the world operate at below $800 all-in cash costs. Keep in mind that these all-in costs include administration costs, sustaining capital expenditures, depreciation and, most importantly, the cost of development and exploration.

Even as gold prices fall, I’m still looking for miners to invest in. I continue to like Silver Wheaton (SLW), Goldcorp (GG), Silver Standard Resources (SSRI) and Sandstorm (SAND) because I believe in the companies and their abilities to manage costs effectively. However, I’m currently sitting on the sidelines on the resource space not because of falling spot prices but because of the global slowdown in demand for gold and metals (and materials in general).

What Am I Watching For?

I’m waiting for demand in China and India to pick back up, or for some country to emerge and demand more metals. My concern is not on falling spot prices because I believe the costs of companies are much lower than reported. Companies have an incentive to reveal much higher all-in cash costs to ensure that prices remain high accordingly (as we’ve seen). Back in early 2000, gold prices were $300 an ounce yet producers still continued to mine gold and make money. It’s very difficult to imagine that production costs have risen about three times what they were since 2005.

I truly believe that once the global demand picture recovers, the best gold miners world-wide will be profitable whether the prevailing spot rates are $1,400 or $900.