A little raw meat on gold from Heinz/Trotsky/Pater Tennenbaum:
acting-man.com
Sunday, October 26, 2008
Gold Stocks
The recent stock market crash/deleveraging stampede has hit many stocks to the point where they actually represent value, mainly in terms of the replacement value of the assets held by the companies concerned (earnings are declining sharply, so most stocks are not yet cheap in terms of their p/e ratios).
Commodity stocks of all stripes have been hit especially hard - which is not too surprising considering the very large price declines in the commodities they produce, but to some extent the declines can no doubt be attributed to the fact that many hedge funds have held large positions in these stocks, so the need to delever has put additional pressure on the stocks of basic materials producers.
Interestingly, gold stocks have fared especially poorly - which is a bit incongruous insofar as the gold price itself, while certainly weak of late, has held up much better than other commodity prices. In short, gold has been rising relative to other commodities, which is exactly what is supposed to happen in an economic bust. Note that many of those other commodities represent a big chunk of the input cost for gold miners, with energy the most important cost item. The best explanation for the poor performance of gold stocks is probably that the sector has been more strongly affected by the indiscriminate selling that has taken place due to being relatively small and illiquid.
Recently several interesting things have happened, from a technical perspective.
For one thing, the put/call open interest ratio of all optionable gold stocks combined has risen to 0,64 (data by Schaeffer Research). This may not sound like much, but it is actually a 'pessimistic' reading when brought into the context of the readings that have been observed over the past year - only about 23,5% of all readings have been higher.
Furthermore, gold stocks have rarely been as cheap relative to gold as they are now. This is happening while gold mining margins are actually expanding (remember, input costs have been falling faster than the gold price).
The HUI index of unhedged gold stocks has plummeted to an area of support last seen in 2005, when the gold price was at around $450/oz. - note that this area of support was at the time the lower boundary of the HUI's trading range.
A number of mid tier and junior miners have seen their market capitalizations collapse to below the cash on their balance sheets, i.e. the market values their mining assets at zero now. Obviously this is unlikely to be sustained in the long term - it is largely a result of the above mentioned deleveraging process, and will be reversed once that process is finished.
A further remark regarding the fundamental situation - the best performing stocks in this sector going forward should be the 'pure plays' - i.e. producers that do not depend too much on by-product revenues from e.g. copper or other base metals, resp. also silver. Also, companies that are largely operating in countries the currencies of which have recently weakened sharply should enjoy a considerable advantage in terms of profit margin expansion.
Below are several charts illustrating the situation. A number of interesting developments can be observed; the recent decline has produced divergences with RSI, and the ratio of the HUI to the S&P 500 has gone into the opposite direction of the Gold/SPX ratio. Furthermore, the ratio of Gold to the HUI seems extremely stretched and due for a large pullback (i.e., the HUI and other gold stock indices should soon begin to rise relative to gold). |
