Gold Notes

GOLD NOTES: May 25, 2017

Every investment portfolio should, at all times, have a minimum of 10 percent in gold assets. This is basically a universal principal of prudent, save and responsible money management. There are many reasons for this. In uncertain times, however, the amount of gold in every portfolio should increase to be 15 or even 20 percent of total assets. With the Trump presidency now upon us we are certainly dealing with uncertainty both in economic and geo political terms.

Now lets step back a minute and look at what happened to gold and gold mining shares in the past 18 months or so. In early December 2015 gold was trading at $ 1070 per ounce. In July of last year it hit a high of $ 1365 per ounce. It was no coincidence that this coincided with the uncertainty around the BREXIT. So roughly speaking we saw a 30 percent increase in seven months. Not a bad return, but if you look at what happened to blue chip gold mining shares in the same time period, it is not that impressive. Shares in the worlds largest gold producers increased by between 250 and 350 percent in the same time period. We are not talking about junior exploration companies that made a big discovery. We are talking about established multibillion dollar mature companies. Understanding some basics of mining economics explains why this happens.

For the big producers their cost of production does not change much in the medium term. Here we are talking about transportation, electrical power, labor and taxes. These are largely fixed. They don’t change rapidly.

Now let’s say a large gold mining company has an average cost of production of $ 1,100 per ounce and gold is selling at $ 1,200 per ounce. They make $ 100 per ounce of production. When gold moves up to $ 1,300 they make $ 200. At $ 1,400 they make $ 300 an ounce. So what happens to the stock price of any company in any industry when their profit doubles or triples? They skyrocket. The same thing that happened last year is unlikely to happen again because gold was at lower levels but an increase of just 20 percent in the price of gold could easily cause Gold mining shares to increase by 60 to 80 percent. This could, of course happen quite quickly.

SPDR Gold Shares (symbol GDX) is a $ 40 billion exchange traded fund that mirrors the price movement of gold almost exactly. This is the most convenient and conservative way to get exposure in this sector.

Barrick Gold Corp. (ABX) is the largest gold producer in the world. It produced 5.5 million ounces in 2016. Cost cutting, divestiture and restructuring have reduced the cost of production from $ 830 to $ 730 per ounce. Among the giant producers it has the lowest cost. Newmont (NEM) is $ 912 per ounce of production while AngloGold Ashanti (AU) has risen to $ 986.

Klondex Mines (KLDX) is an impressive and rapidly expanding gold producer with operating mines in Canada and the United States. The management team are considered the best in the industry. Huge upside potential on this one.
Grant Oliver. Mining Analyst, Tatler Cox.

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