Are Gold Mining Stocks Undervalued?

I think so -- compared to the bullion.

But note that my view only remains valid if my assumption that the gold bull market is real, and has not reached "blow off" bubble stage yet.

We've seen some wild times over the past week. I haven't been posting because I'm swamped with non-blogging stuff in life. But I'm keeping my eye on things, and my gold/equities/cash positions have let me sleep well in these markets. My overall portfolio is down a bit. But, aside from gold, the good thing is that my VXX position in back in the black.

Anyway, back to the subject of this post.

If you haven't seen it yet, and you have access to FT.com, read John Dizard's piece on gold mining stocks from the end of July. He quotes a familiar name in these parts -- John Hathaway:

“More than half of them [junior stock promoters] are liars and crooks,” Mr Hathaway says, “and you will only know which ones if you spend your life around the mining business.

The financial statements for those companies are meaningless, because they don’t produce anything.” Only extensive contacts, checks, and site visits will sort them all out.

Like many gold market professionals, Mr Hathaway thinks it’s about time for a gold price correction.

After that, he sees a resumption of the secular bull market in gold. However, the gold mining stocks could rise even in a stagnant or falling gold market. That’s what happened for a couple of years following gold’s last peak in early 1980.

And after that? Mr Hathaway says: “We talk among ourselves about what would be the right moment to shut down the fund, or at least steer investors to other funds.”

That’s apostasy to a real goldbug, but this should be about money, not religion.

Hathaway started his fund in 1998, when everyone was ga-ga over tech stocks. That's one reason I pay attention to him. He's not some promoter.

You read Dizard's column here (again, if you subscribe to FT.com).

Comments

[Taylor]

I've sat in on enough junior gold/resource company presentations myself at this point to have to agree with Mr. Hathaway.

I look at it like this: the average gold mine takes years of exploratory work, drilling and testing, regulatory finagling and perhaps most importantly, luck, to turn into a producer. Hundreds of millions to billions of dollars of capital will be sunk into each one of these holes before the first ounce is brought out. These are tough projects in far off places and they require a lot of specific technical and financial knowledge to make them happen. So, how do these companies generally tend to finance themselves?

By traveling city-to-city throwing lavish lunches for local groups of retired CAN SLIM retail investors and platelickers. That seems like an expensive, inefficient way to raise the kind of capital necessary for the average gold mine project! Nevermind that the "smart money" has already got in way beforehand with millions upon millions of warrants before the platelickers show up. They're dead money. Some of them even know it. The IR rep claims he's there to build a following of "long-term investors" but most people just ask what kind of tradeable news they can look forward to in the next 3-6 mos at which point they dump the shares to the next group of suckers at the next city's luncheon.

It's a scam. If these projects are real and there's money to be made the banks and big, sophisticated entrepreneur investors should be all over them. But they aren't. I'd be upset if I didn't think the victims were mostly willing.

You can't value most of these companies. They're all pedaling golden dreams and that's it. Big cap producers, that's another thing, but these juniors-- as Hathaway says, without a friend who is a trained geologist who has been working in the field for 30 years, you're flying blind, with a black bandana tied over your eyes, at night, in the middle of a blizzard.

I am curious what the hell you're doing in VXX as a mostly-value investor? Despite my gruff way of asking, I am not accusing you of stupidity and I am genuinely curious to understand that one.

[krs]

And another positive view.

http://money.msn.com/investment-advice/there-is-gold-in-mining-stocks-yet-fleckenstein.aspx

[Andrew Statezny]

Whether you sell gold in Oklahoma city, in Phoenix, or in Dallas it seems like it's the right time to make the move. Gold prices are high... I'd sell before the bubbles bursts.

[harry]

I think gold price has been overvalued by zero interest rate policy of Fed. This is why I do not buy gold or gold company stock for long term investment

[El Toro]

http://www.hussman.net/html/gold.htm

Written in October 1999 but still valid. Now is the time to own gold stocks.

[Roy Stanton]

I think gold is only taking a breather - it's run too hard and too fast of late, coupled with the CME margin hikes. However, the current Fed policies make me believe that there is still much further upside to the gold price. This next leg up may well be the final "blow off" but if it is, I expect a gold price in excess of US$3,000/oz. Many commentators are now talking of a scenario where the Dow = 1 oz gold (either the Dow collapses or is propped up by hyperinflation).

Gold stocks are undervalued given the current (and my view of future) gold prices. However, I would only be recommending existing operating mines and not "blue sky" mines. Mines still in early development stage may find that they are too late to the party!

[Jason]

The stocks themselves cannot catch up that fast with the dynamics and volatility of the precious metals market, but once everyone is convinced that gold and silver are not bubbles, the stocks will also rise, so its good to own some of them right now.