Forgive me, Larry, but my response was so good, I'm submitting it to a newsletter for whom I write the feature article. As such, I've edited and rephrased some of my previous reply, to make it more readable by my readership. Please permit me the unabashed luxury of reposting my previous response in better grammar and sentence construction. I hope you do not mind.
The rest of the thread be damned<grin>
What you observed this week in particular is the result of anti-gold Barrons taking another one of their patented swipes at the gold equities market with their negatory piece proclaiming loudly to anyone who listens that...BASED ON A CASH FLOW METRIC specious argument, that all gold equities were overpriced and therefore, deserving of being sold and resulting funds be placed in physical bullion.
IT is a bogus argument, and one that only helped trapped equity bears in rising equities climes.
Three (3) things to remember about gold equities:
1) GOLD MINING COMPANIES are based on ASSET VALUATION not on "cash flow metric." That would be like claiming that because the restaurant sector had poor "book to bill ratio" no one should own a restaurant stock. Everyone knows that the “book to bill ratio” is a metric for valuation of semi-conductor genre equities. Another example of a specious metric valuation argument would be to apply the Chicago Purchasing Managers data which tracks inventory flow and build up of the manufacturing industry to accurately value airline sector stocks because by some stretch of the imagination, they are building up an inventory of unsold seats, and those accumulated unsold seats needing to be "worked off." Apples and oranges metrics in all 3 instances.
Several of the gold mining companies are only selling enough gold throughput to pay the bills, and are holding “excess” physical bullion for either better future prices b/c they all see what we pedantrian plebes see as the new confirmed trend, OR they plan to sell the stockpiled bullion and use the proceeds to pay a special dividend; exactly what one large gold miner did this week. And that goldminer’s action was reported AFTER the Barron's hatchet job, but took place prior to the release of the negatory Barrons article. (BTW...the last hatchet job on gold done by Barron's was in February 2003 when they took aim to Royal Gold's Royalty Model valuation metric and used the wrong yardstick to measure IT as well.)
2) Mutual funds by virtue of size and competition for sector dollar deposits, all play the same VERY SMALL POOL of large names, by and large as their “core holdings.” This is simply due to their need for liquidity so that the individual mutual fund manager can get in and get out of the gold equities' market without either raising or lowering the market in that small sector by the very buy/sell ticket size they themselves generate when they lumber around in their executions.
It stands to reason that when Barrons conducts an illogical stampede, ALL blackbox players--mutual funds, hedge funds, daytraders--(makes no nevermind)–they all herd surge out of the largest equities' names plus several small names as well--and drag down gold equities, which are then reflected in your NAV. After all, the fund managers get paid on performance, not on lower NAVs.
3) As you have accurately observed, there IS a lag period between gold equities’ appreciation and gold bullion appreciation in your personal 50/50 allocation model.
Why? One has to understand the pokey analyst world who works by what I call a mixture of "committee thinking" and "rookie rabbit ears."
The committee thinking process is a “group think” dynamic shared by all the "gold fund managers." It is WORK, and I do mean work, to re-examine their spreadsheet data (for lack of a better nomer) in light of rapidly moving underlying physical commodity price appreciation. They don't just go to the column marked “Gold Prices,” plug in $410, and voila, a new "equity valuation” immediately blinks to the bottom line of their spreadsheet.
These fund managers have to re-evaluate weighted assay averages on known mine data (a good days work for just the metallurgical types or the geologist types, guess what management is “group thinking” in light of higher prices, conduct surveys of management to determine THEIR group think re: expanding reserves potential and corporate planning and budgeting for expansion, etc., etc., etc.
All the time, they are looking askance at the flow of geological data, price data, supply data, demand data, seasonal data, economic data, trying to put their finger on what is conservatively predictable in all those metrics prior to making their buy/sells. THEY HATE to move suddenly such as when they are driven by huge outflows from disgruntled pension funds for example, scared by recent Spitzer-like revelations.
And they all have a case of “rabbit ears” i.e., a baseball term referring to a pitcher who can’t tune out the crowd and just do what he’s paid to do, pitch, or in the case of the Fidelity Selects of the world...tune out what the rest of the “group is thinking.” Seasoned managers like non-rookie pitchers, must come up with the best equity valuations “game plan” based upon their own unique mixture of stocks, top and mid-tier producers, and the out and out speckies, and manage accordingly, sector competitors be damned.
So, while physical gold is free to respond immediately to supply/demand based buying/selling in an open outcry auction system--at least here in NY– and who are free to respond immediately to ESF and Locals running prices daily up and down the flagpole to see who salutes, mutual funds by and large are the slow-deliberate elephant in the space, as opposed to the more nimble physical gold valuation player.
Chew on this, and you'll begin to understand why I said what I said in the first response to your query.
The short answer is NO, you're not seeing an overbought condition in the equities correction. It is my thinking gold mining company managements themselves haven't even begun to catch up with this latest bullion move that is still very fluid and very strong and very much nascent in terms of duration.
Look at it this way:
Physical gold is up OVER $400 --a psychological benchmark I'll grant you--only some 13 out of 23 banking days, and only higher closes above $400, 2 out of 2 Fridays in a row.
There's no way in hell, equities analysts have had time to reconstruct or re-evalutate gold equities, and tweak spreadsheets.. It simply isn't in their nature to do this ASSET BASED METRIC recalc, which IS the proper valuation metric, in a clime of newer/higher gold prices +$400 trend that has only been in place 13 out of the last 23 banking days. (There are an average of 22 Banking days in a business month.)
The very management personnel MF managers have to survey in order to re-jigger their spreadsheets don't even agree yet on what they are going to do, or if this above $400 is "for real"
There are Gold mining company management teams that don’t yet believe AND probably won't believe "above $400" is for real for another 2 years, frankly...the last 22 have been so very very brutal.
Regards |
