The Miners

[Storm]

My GDX holdings are down 10.8% from when I purchased.  Is it time to kick this puppy to the curb, or is it time to back up the truck and load up on cheap GDX?

Hard to believe that the miners could be down 13% in a year where gold has held steadily above $1500.  Is the market blind, or are the miners really in bad shape?

[MediumTex]

My GDX holdings are down 10.8% from when I purchased.  Is it time to kick this puppy to the curb, or is it time to back up the truck and load up on cheap GDX?

Hard to believe that the miners could be down 13% in a year where gold has held steadily above $1500.  Is the market blind, or are the miners really in bad shape?

Miners are normally leveraged, and everything that relies on leverage is selling off right now.

[escafandro]

I buy some stocks of BVN (Compania de Minas Buenaventura), a peruvian companie that loss above 12% because Ollanta Humala won the presidential election. But I think there will be no real changes in economic policy in Peru. So I hope can be recovered in the short-term.

[Pkg Man]

I buy some stocks of BVN (Compania de Minas Buenaventura), a peruvian companie that loss above 12% because Ollanta Humala won the presidential election. But I think there will be no real changes in economic policy in Peru. So I hope can be recovered in the short-term.

I used to own it, and made quite a bit on it before selling it as part of the conversion to the PP.

I think this illustrates why miners are no substitute for gold, which is exactly what I would have thought before finding HB and this forum.

[Jan Van]

My GDX holdings are down 10.8% from when I purchased.  Is it time to kick this puppy to the curb, or is it time to back up the truck and load up on cheap GDX?

I bought some VGPMX (Vanguard Precious Metals and Mining) at the beginning of the year. I've been down almost 11% in mid March, up over 9% early April and now down 5.5%. Now, did somebody say this is a volatile fund?

[Wonk]

My GDX holdings are down 10.8% from when I purchased.  Is it time to kick this puppy to the curb, or is it time to back up the truck and load up on cheap GDX?

What you're feeling is the heat from the kitchen.  Miners routinely have 30%+ corrections so it's all part of the territory.  You have to ask yourself why you own these companies (via ETF).  Are you in because you believe in the fundamentals?  If so, you'll need to pinch your nose and hold on.  Gold is in a secular bull market and from time to time you'll get PE compression in the miners.  That doesn't mean the fundamentals are any different.  Do yourself a favor and pull up a 10 year chart of HUI and see where we are at the moment.  I think it'll make you feel better.

Hard to believe that the miners could be down 13% in a year where gold has held steadily above $1500.  Is the market blind, or are the miners really in bad shape?

The herd doesn't have much of an appetite for risk at the moment.  The Gold/XAU ratio is over 8.  A few years ago it touched 11.  If there's another liquidity crisis brewing, there could be immense pain ahead for the miners.  If you see that ratio hit 10+, back up your VP truck and buy.  I absolutely love this sector at the moment.  I think there's great value in the miners.

[HB Reader]

If the current weakness in the gold miners gives you serious heartburn you shouldn't be risking your money in the sector.  The miners, especially the smaller ones, have historically been subject to huge swings in sentiment and long periods of dormancy.

A rising gold price serves to draw attention to the mining sector, but moves in the broad market indexes and other influences often seem to irrationally dominate in the short and intermediate term.  Reliable fundamental and technical research about the sector is also hard to find.  Combined with large swings in liquidity, these factors keep many individuals and most institutions away from the sector.  Paradoxically, I think this "market inefficiency" has created for the next few years one of the rare investment situations where an individual with a fairly disciplined strategy who can stomach risk and volatility is on an equal footing with bigger institutions.

Like Wonk, I like the odds here.  But I'm only betting a big field, not the entire farm, on it.         

[Storm]

My investment in GDX is pretty small actually, only about 10k.  I look at it as a long term investment (2-3 years) based on the fundamentals of gold.  It just hurts to see it down 10% when the rest of my VP and PP have been doing very well.  I'll stick it out though.  Your words of encouragement help, believe me.

[HB Reader]

My investment in GDX is pretty small actually, only about 10k.  I look at it as a long term investment (2-3 years) based on the fundamentals of gold.  It just hurts to see it down 10% when the rest of my VP and PP have been doing very well.  I'll stick it out though.  Your words of encouragement help, believe me.

Yeah, that's about my notional time frame right now.  If we're right, I won't be afraid to take some profits along the way.  I took some profits (about 20% of my overall position) on several of the smaller miners back in early March, but figured I'd let the rest ride for some time.

This being my speculative money, my positions and time frames could change at any time, but I'm not too concerned with the volatility just yet.  If we are right, we'll get paid for the ride.  If not, it won't be the end of my world.   

[AgAuMoney]

My GDX holdings are down 10.8% from when I purchased.  Is it time to kick this puppy to the curb, or is it time to back up the truck and load up on cheap GDX?

Hard to believe that the miners could be down 13% in a year where gold has held steadily above $1500.  Is the market blind, or are the miners really in bad shape?

I think the discrepancy is mostly due to uncertainty.  This affects gold positively, and affects miners negatively.  Uncertainty can be caused by mixed signals (as opposed to nice trends) or by conflicting signals.  Let's look...

Six months of gold prices:  http://finance.yahoo.com/q/bc?s=IAU+Bas ... &t=6m  Looks to me like the range is about 1280 to 1575 but no clear trend.  (other commodities are similar)

So is gold long-term stable now at around 1500?  Is it still trending up?  Down?  Nobody knows, which makes it difficult to predict future mining revenue.

Inflation also doesn't seem to be in a trend.  The problem with inflation (or the expectation thereof which is what gold prices may indicate) is that future costs are unknowable.  Obviously this mostly affects smaller miners (exploring or developing) which are typically on the edge or even bleeding money.  The big boys with producing properties are typically better off, but still questionable.  Gold production costs per ounce have risen dramatically in the past 5 years, and if we continue to have oil at $100 per barrel they are going to go up even more, and if oil goes higher...

When you combine unknown costs which are typically close to revenue, and unknown revenue because of recently erratic commodity prices, investors are justifiably cautious.

I'm still up 14% in GDX, but down 10% in GDXJ.  Looking to pick up another block of GDXJ next week.  I'm hoping monday will be an up day...

[AgAuMoney]

I'm only betting a big field, not the entire farm, on it.         

"only betting a field,"  I like it. 

[MediumTex]

The miners are looking prettyy good right here.

Maybe Wonk will chime in with his thoughts.

[Wonk]

Yep, miners are still my favorite at the moment.  Gold/XAU ratio at 8.34 today which is about as high as it's ever been (with exception to 2008).  Another metric I really like is Gold/CCI, which is the ratio of the price of gold divided by a broad basket of commodities.  Miners would want that ratio higher as it indicates larger spreads on the margin between input costs and finished price.  Even with average management, earnings should expand throughout the sector.  Currently sitting at 2.61 which is pretty close to it's high at 2.9.

Right now appears to be a classic "long term buy" and "short term hold/sell" moment.  Miners have struggled to stay above the 200d moving average, which is not good in the short term.  I think there's a pretty good chance the next few months could get very ugly.  2008 could have just been the appetizer before the main course.  That said, Mr. Market is fickle and miners could become a new favorite asset class in short order.

M&A activity is sure to heat up as the entire industry is having a harder time opening new mines with "low hanging fruit."  Junior explorers and producers who can show real reserves are going to get snapped up.  I just love this industry over the next 5-10 years. 

[Storm]

Looks like gold is approaching $1900 an ounce, and inputs (mainly oil) have dropped significantly.  Oil is almost $80 a barrel now.

The fundamentals are becoming extremely favorable for the miners, but I have yet to see any significant price appreciation.

[Wonk]

Looks like gold is approaching $1900 an ounce, and inputs (mainly oil) have dropped significantly.  Oil is almost $80 a barrel now.

The fundamentals are becoming extremely favorable for the miners, but I have yet to see any significant price appreciation.

Jesse Livermore said famously, "Be right and sit tight."  That applies here.  It may be 5 days, 5 weeks, 5 months or 5 years until we see a major move.  You already know the fundamentals are improving, so there's nothing else to do at the moment. 

[mandynshane]

Could it be that Miner's are suffering because of the risks involved- I like just holding gold bullion, I'm concerned as the price of gold and silver goes up that governments might try and nationalize mines and resources. Chavez Preparing Government Takeover of Venezuela’s Gold Mining Industry, Politicians could  nationalize gold mines or heavily tax companies that produce and trade in this precious metal.

In 2005 Chavez, the Venezuelan president announced the confiscation of the property held by Crystallex, a Toronto-based gold-mining company. This resulted in a drop of its share price by 50 per cent in a single day. The dictator levied taxes on many foreign countries or nationalized whole industries.

[Storm]

Could it be that Miner's are suffering because of the risks involved- I like just holding gold bullion, I'm concerned as the price of gold and silver goes up that governments might try and nationalize mines and resources. Chavez Preparing Government Takeover of Venezuela’s Gold Mining Industry, Politicians could  nationalize gold mines or heavily tax companies that produce and trade in this precious metal.

In 2005 Chavez, the Venezuelan president announced the confiscation of the property held by Crystallex, a Toronto-based gold-mining company. This resulted in a drop of its share price by 50 per cent in a single day. The dictator levied taxes on many foreign countries or nationalized whole industries.

This could definitely be a risk, however, I believe that most of the miners in GDX have mines in Africa rather than Venezuela.  Barrick gold I believe is the largest component, which has mines all over the world.

There is certainly nationalization risk in a lot of countries, however.  If gold goes parabolic there may even be nationalization risk in the US just because politicians will claim something like "it destabilizes the dollar" or some other such nonsense.  The dollar is being destabilized just fine already, thank you very much...

[AdamA]

For those holding miners in their VP's:

What strategy are you using?  Are you buying and holding?  If so when would you sell?

Do you keep a miner/cash split and use rebalancing bands?

Options?

[Storm]

For those holding miners in their VP's:

What strategy are you using?  Are you buying and holding?  If so when would you sell?

Do you keep a miner/cash split and use rebalancing bands?

Options?

So far I'm just doing a buy and hold.  I bought GDX on October 8th, 2010.  Since then it has had about a 15% gain, which is pretty low considering how well gold has done in the last year.  I only put about $10K of "play money" in though so it's not the end of the world.

Based on the success of our LEAPS PP practice round I'm probably going to close this position when it reaches the 1 year (long term capital gains) mark and use my play money for the LEAPS PP instead.

[Wonk]

For those holding miners in their VP's:

What strategy are you using?  Are you buying and holding?  If so when would you sell?

Do you keep a miner/cash split and use rebalancing bands?

Options?

I'm a buy & hold kinda guy when it comes to miners.  I'll sell when the wind from the fundamentals is in my face rather than at my back--such as a year or two after a major parabola in gold prices.  I only hold 20% of my total portfolio in the PP.  The other 80% is VP between gold/silver/miners/cash.  For the miners, I split it mostly even between majors and juniors.  I'll typically build up dry powder on a monthly basis and buy when I think one of the gold/silver/miners is undervalued.  At this point, nothing looks more undervalued than miners, imo.

I don't buy individual mining companies.  I like the broad sector diversification that Van Eck gives through their funds.  That said, I recently pulled the financials of Barrick, which is the largest gold mining company in the world and a bellwether for the sector.  What you see up to 2008 is a company struggling to increase net income because of a massive hedge book.  They took the $5.7B hit to remove the hedges in 2009--which is reflected in the income statement.  What should be interesting to most investors is the tremendous weight that was lifted off their shoulders.

In 2008, they reported net income of about $800B.  In 2009, it was ($4300B) due to the write down and in 2010, $3300B.  If you subtract the hedge loss from 2009, they've seen a 100% increase in net income in each of the last 2 years.  Currently, their P/E is under 14.  If Barrick's shares are trading at the same price a year from now, their P/E will likely be under 10.  My point is, at some point valuations will reflect fundamentals.  Right now, there is little to no hedging in the producer space so we should see continued outperformance as input costs have remained tame. 

Investors sometimes buy into the "story" part of a company (a la Nasdaq late 90s) but at the end of the day it's earnings growth that will turn undervalued companies into overvalued companies.  Since I buy into gold's fundamentals, I buy into gold mining fundamentals now that the hedges are removed.

[Jan Van]

Anybody got an opinion on Vanguard precious metals and mining?

[MediumTex]

Anybody got an opinion on Vanguard precious metals and mining?

That fund holds a lot of companies that do different kinds of mining.

I would stick to a fund that only holds gold mining companies.

[Storm]

Wonk, thanks for doing that research into Barrick.  They are the largest holding in GDX, and what you're saying makes sense.  Since they are the largest gold miner in the world, that hedge weight around their neck must have been dragging down the whole sector for the last couple of years.

Investors are pretty slow to come around after all - I mean, look at Apple during the early 2000s.  Steve Jobs was back as the CEO, the iPod was selling like hotcakes, new Macs were winning market share, and Wall Street still took a dump on their stock for years.  It wasn't until they started shoving tens of millions in iPhone sales down analysts throat that people started to finally pay attention and now look at their stock - just closed over 400 today...

[Wonk]

Wonk, thanks for doing that research into Barrick.  They are the largest holding in GDX, and what you're saying makes sense.  Since they are the largest gold miner in the world, that hedge weight around their neck must have been dragging down the whole sector for the last couple of years.

There were a good number of companies with hedges.  What I can't figure out is why they would hold on to the hedges that long.  Most of management should have been lynched by the shareholders 5 years ago.

Investors are pretty slow to come around after all - I mean, look at Apple during the early 2000s.  Steve Jobs was back as the CEO, the iPod was selling like hotcakes, new Macs were winning market share, and Wall Street still took a dump on their stock for years.  It wasn't until they started shoving tens of millions in iPhone sales down analysts throat that people started to finally pay attention and now look at their stock - just closed over 400 today...

I confess I didn't watch apple too closely, but I believe it.  The more I look, the more I'm firmly convinced there's no such thing as a fully efficient market.  Markets are people and most people make emotional decisions--especially in groups.  Herd behavior is to be expected.

[HB Reader]

I sold a small very short term EDV position and picked up a few shares of GDXJ and PMPIX in my VP today.

I'm obviously assuming that we are still in a longer term gold bull market.  If that assumption is correct, I think the miners represent great speculations.

Adam1226 --  I'm not using any particular strategy other than that I confine what I consider to be the most speculative holdings in my VP to 20% or less.  Sometimes I will hedge a little with put options or put in tight trailing stop orders when I want to lighten up, but I'm not currently hedged in any significant way.  The miners currently represent about 15% of my VP.  If they start to crowd 20% I will lighten up a little.  If the miner weakness continues and I don't change my gold bull market assumption, I'll probably continue nibbling.  Miners could peak even after a bullion peak.