The Attractiveness of Gold
In a recent blog, I suggested that patience and technical indicators were key in buying gold. I suggested that the moment had not yet arrived to make this investment again.
This week there were announcements from Bankers in parts of the world that they were adding to their gold purchases. Bankers do not time the market as investors time the market. They increase or increase their holders for other reasons.
When a European bank and an Indian bank both announce in the same week, that they are increasing their holdings of gold, it is time to take notice. After those announcements the price of gold moved up, but only about $25 per ounce, so the breakout above the trend line that I wrote about has not yet happened. However, it is another indicator in the right direction. Those more adventurous might find this a very positive indicator.
Commentary on Basic Long Term Market Forces v Analysts’ Opinions
The value of small caps gold miners August 26 2011
In case you missed it, RBC Capital Markets in August 2011 decided that they were going to look at the junior gold mining sector. Remember that RBC is a highly conservative and enormously large financial institution. They rarely bend so low as to look as junior resource stocks.
RBC Capital Markets (Royal Bank) in August 2011 “saw potential in unpopular, undervalued gold equities” and urged readers to take “a fresh look” at gold companies in their report. RBC says gold companies currently have profit margins that are at record highs and it believes profit margins could be approximately $1,200 an ounce for the next 12 to 24 months.
This is substantially higher than the 10-year gross profit margin average of $320 an ounce. Comparatively, many current projects were economically sound at $700-$1,000 per ounce gold prices, creating $300-500 an ounce margins. This $1,000 estimate of gold prices compares to the current gold price of $1,600.
Increased profit margins put more money in gold company coffers and this is reflected in the unprecedented amount of free cash flow (FCF), RBC says. The firm says the industry has reached an inflection point with a “substantial wave of free cash flow” coming over the next 1 to 2 years.
Another large and conservative financial institution came out at the same time and said the following. BMO (Bank of Montreal) says gold stocks are currently trading at historically cheap levels, which the company sees as an opportunity investors can take advantage of.
RBC attempts to quantify that opportunity by saying “if gold prices remain elevated and/or investors accept a higher long-term gold price, we could see 25-50 percent upside in equities.”
Bold Statements, Except Completely Wrong
These are bold statements. Unfortunately, shortly after this report, the markets in general, and junior gold stocks in particular, took a precipitous drop and the autumn months of 2011 saw a financial disaster for the stock value of junior mining stocks. Anyone investing in stocks in September and October 2011, had their investment portfolios reduced in value substantially, especially if you went into junior gold mining stocks.
So much for supposed insight of analysts from our major institutions. Does that make you realize where your Investment Advisers get their information from, and how valid that information is?
Next – What the average investor should look for.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
