I thought I was going to lose my teeth as the truck bounced through gullies and over rocks. We were going through the Australian bush. BTW, I’m not complaining! I loved it! Such beautiful scenery and great company.
The driver is a true expert on mining and has been involved in mining for about 30 years.
One of the key things he mentioned was the fact that costs of gold mining will be coming down, thus returning gold miners to profitability.
You see, many commentators has pointed out that the cost of mining an ounce of gold is somewhere between $1200-1700 per ounce. It really depends on how much you allocate of corporate overhead and initial capital outlays. At these levels, many if not most gold miners are losing money on their production.
So far, we have not seen any miners cut back their production but we are seeing a virtual halt to any new production or capital outlays for production. This will lead to a sharp reduction in the growth of new mines and therefore start to squeeze the supply side of the equation to a more bullish situation.
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Another bullish feature is that many of the big miners have been writing off their past sins. For example, they bought other companies at the top of the gold market and now those assets are crushed. So they write off the value. This causes them to lose billions of dollars over the near term but will cause a big increase in earnings in the future. The old problems are wiped out leaving just good news ahead. I believe this factor is one of the main reasons for the rally in gold stocks over the last month.
The big gorilla is the Fed, who will then continue to worry the gold market with talk about tapering. The market is worried that the Fed decreasing their insane easing posture will hurt the demand for gold. I, on the other hand, think that this factor is completely baked into the price of gold. Who doesn’t think the Fed will have to tighten or at least stop easing sometime in the future.
When will this bullish case come to pass? Soon but not right away.
Normally stocks lead the metal. Yet stocks are still weaker than gold which suggests to me that gold could take another dip before the bull market begins. This could be on the back of weaker growth in China.
So watch this indicator to confirm that the bull market in gold stocks is back in play!