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Gold/Mining/Energy : Precious and Base Metal Investing -- Ignore unavailable to you. Want to Upgrade?

To: krishnamurti888 who wrote (20895)	9/22/2003 12:40:51 PM
From: peter snowdon	Respond to of 39344

However the gold equities, are really no more than options on the gold price and as such it is not so extraordinary for options to benefit by up to 10X the underlying. as i understand it, this is true at certain times during gold bull markets, and not at others. the price of gold equities is NOT simply a math function of POG, as it is influenced by other factors: these include the liquidity factors which russ analyses, and the fact that the time value of a gold equity is determined by a combination of the rate at which the mine is being run down, the speed at which resources are converted into reserves, and the cost of acquiring new resources/exploration potential. as warren used to say: at the end of the day, a mine is just an empty hole in the ground. the business of a gold mine is selling off the finite quantity of stuff which constitutes all its underlying value. unless it can buy in new stuff cheaper and faster than it sells the old, it will have a negative IRR. by the time everybody expects POG to rise indefinitely, most mining companies will be aggressively destroying their own value by buying whatever overpriced resources and/or land they can lay their hands on. so gold equities function as options partly because their CF increases exponentially as POG rises, and partly because people misunderstand the underlying economics of the business, and behave as if this rise in CF was a sustainable business advantage, like you might get from K or WMT. as a result, gold equities can experience long periods of flat-to-down, even as POG continues to rise. on the one hand, there is no money left in the market to buy them, or that wants to buy them; and on the other, industry F and D costs begin to outpace sustainable earnings gains. betting that the next big move for gold shares is down at this point in time, tho, is mainly a bet on the fact that although the total universe of gold shares is small, the amount of money chasing them at this moment is not large enough to resists a downturn in the general market. (i.e. the money which has fuelled the last few months' rise in the HUI is not coming from the people on this message board, but is marginal money from people whose other equity holdings will be caught in a main indexes downdraft, and that will take us back to another period of basing, followed by another. possibly longer, leg up.) (this is my naive understanding of the situation: any corrections would be much appreciated!) peter