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Strategies & Market Trends : The New Economy and its Winners
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To: Madharry who wrote (26730)12/30/2005 9:17:05 PM
From: Rarebird  Read Replies (1) of 57684
 
>>As the price of gold goes up, gold companies should be earning accelerated profits at the margins.>>

Not necessarily, for Gold is not just a commodity, it's a Currency. In 2003-2004, the $US decline helped gold bullion but was not kind to some of the Gold producers. Need I remind you? The South African Gold Miners, like DROOY, GFI, HMY were looking at major cost increases and declining margins. The strong Rand and rising costs of production hurt profit margins. Rising oil prices affects the Miners bottom line too. Australia and Canadian shares are not immune to the margin squeeze either. Of course, some mining companies hedge currencies and have done better, like Barrick Gold.

The POG has risen this year due to 4 factors:

1)new Dovish Fed Chairman
2)financial insurance
3)inflation hedge
4)capital gain opportunity

2006 looks like a Bear Year for the USD. That is not good for profit margins for South African Gold Producers.

>> I believe your model implicitly assumes gold is range bound.>>

Not at all. The Gold/XAU Ratio says that the POG should be much higher given the value of the XAU. So, the time has come for the POG to put up or the XAU to shut up. At this level, the XAU may just sell off even if the POG rallies.

The Gold Miners basically trade in anticipation of Higher Gold Prices. Most Gold Bugs think they are unique; but they usually suffer the same fate as most of the old Dot.Com investors/traders. Don't mix up value for momentum.

PS I'll post in real time when I go short the "barbaric" miners.

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