In recent posts, I have been pushing the idea of long gold, short bonds (GLD/TLT) as a long term trade. One of the questions I was asked it what do I think of gold miners then? Instinctively, we think gold mining must be great. English speakers often refer to a lucrative undertaking as a gold mine. But one minute of research such as looking at the performance of a gold miners index such as NYSE ARCA Gold Bugs Index (it has a longest price history of gold miners), should tell you that always buy gold, and never buy gold miners.
Gold mining bulls tend to focus on the period from 2001 to 2008 when gold miners rose 10 times, while gold itself only rose 4 times as reason enough to be invested in gold miners.
The real question investors should be asking is why do gold miners lag the price of gold so much over a cycle. The answer has to do with the very nature of gold. Its value comes from being difficult to mine. Not only are upfront capital costs substantial, the operating costs tend to eat most of the profits. My sons were watching the quality TV show “Aussie Gold Hunters”, and at the end of the day the prospectors would proudly declare they had found USD 1,000 worth of gold. The narrator would then explain they have spent USD 700 of diesel in operating the earthmover, and when you added in living expenses etc, you quickly realised the prospectors were losing money. Newmont mining, which is the biggest and best gold miner shows how hard it is to remain profitable as a gold miner, with profits swinging wildly between losses and profits.
So is there a “good” time to rent gold miners? My best best would be when the industry has been starve of capital investment for some time. Looking at the history of Newmont net cash from investing activities, the 1990s saw very little investment, but even today investments remain strong.
I would suggest looking for more capital discipline from the sector before “renting” gold miners.
HI Russell,
I work in a capital allocation team for a Gold miner and this post is brilliant, I learnt alot.
I wonder if low-capex-periods precede a run in equities for other commodities (e.g. Shale)?
Posting this one on Twitter is risky!
Cheers
Ben
Typically the best lead indicator for commodities is a big increase in capex. See iron ore miners, or shale.
For most listed mining stocks these days, investors want to see growth, so the option of returning cash is frowned upon, whereas it often the best possible thing to do!
nice one 👏👏👏
How Gold/silver miners' capex of past few years compares relative to the history?
Sorry for the late reply. Still elevated last time i looked. Will look again
this is very interesting. u r death right on this
bitcoin and bitcoin miners (exchanges) also seem true these days! You can own bitcoin - but dont own any businesses related to bitcoin!
I don't know much about cryptos but my understanding is that even if you store your bitcoin in a cold storage wallet, it's worthless without the distribution network and crunching numbers farms. Gold doesn't need the miners or any distribution system or electronic plug.
They are open ended put options on the petrodollar system (which is yet to go pop). As such they don't and won't work properly until then. Silver miners have yet more optionality with no additional premium, just more vol.
I am not sure that is true - but I love the term "open ended put options on the petrodollar system". Let me have a think about it...
As usual you don’t leave any doubts on your Gold Miner opinion. Poor Tavi.
I thought I understood them cause of my background in oil and refining, but clearly i do not.
Excellent analysis, wish I had this months ago when i bought into the major dip in miners after a successful trade in and out of them during their run up.
Guess I'll hold and just accept the dividends until I can get out of the trade in the future
thanks Russ
Another thing to consider is that the true 'gold bugs' were borne in the 70s & after '08. For those who say Gold is just a play on lower real yields, should add that yes that's correct, but the other & in my opinion, real 'value' of Gold is essentially a Call option on loss of confidence in Central Banks/fiat; which should grow significantly in value in the years to come
Gold has been decent in sterling terms this year! To your point...