A brief update on gold

There have been considerable conniptions, consternation, wailing, and gnashing of teeth over the price of gold in recent times. Here is a quick look at reality. Below is the graph of the natural logarithm of the price of gold (measured by its proxy GLD) from its inceptions in 2004 to present day:

You will note that the graph hugs its trend line very closely, and has not really deviated much from its appointed rounds. You do see a wiggle at the very end, but a quick check will reveal that over the entire history, GLD has been gaining 7.2 basis points a day on average, with standard deviation of 13.5 basis points a day (so Sharpe ratio of 0.85), while over the last twelve months, the average return has been 6.8 basis points a day, with standard deviation of 13.4 basis points, for Sharpe ratio of 0.81, so yes, the risk adjusted returns have dropped, but not hugely. Notice also that the graph (at least in the date range shown) shows no indications of a bubble (you can see a mini-bubble in early 2008, followed by the mini-crash in late 2008 -- presumably the mini-bubble was caused by the contemporaneous, and much more substantial,  oil price spike, while the crash was caused by the general panic of the crash of 2008, but not again that the crash was much more mild than the crash in the oil prices (factor of six, peak to trough), and the stock market (close to a factor of two).

Marc Faber: Gold is Dirt cheap.

Faber is not a stupid guy.

Your friend igor@rivinfinancial.com has shared a link with you. Marc Faber: Gold is "Dirt Cheap" — Price Could Reach $10,000 per Ounce | Daily Ticker - Yahoo! Finance http://finance.yahoo.com/blogs/daily-ticker/marc-faber-gold-dirt-cheap-price-could-reach-130058708.html Eleven years into a gold bull market, Marc Faber publisher of the Gloom Boom and Doom report still doesn't think gold is in a bubble. Joining us via Skype from in Chiang Mai, Thailand Thursday, Faber told the Daily Ticker's Aaron Task there are fundamental reasons why gold, already nearly 30% higher for they year, [...] Read the full story

The continuing mystery of gold

Actually, as previous posts seem to indicate, there is no great mystery to gold: the executive summary is that it is not so much that gold is going up as that the dollar is going down. What is, however, mysterious, is that the gold miners are not doing very well. Indeed, this year, gold prices (as measured by GLD) have gone up some 8%, which is (as of today, June 8 2011) considerably better than any of the stock indices. Gold miners, however, are performing truly abysmally: the chart below shows the performance of gold vs S&P 500, vs NEM --  Newmont Mining (NEM), which is down almost twenty percent year to date. A picture is worth a thousand words:

 Newmont's friends and competitors which constitute the GDX ETF are doing abut the same. Now, if gold prices were very high compared to the cost of extraction, then gold miners should be doing very well. If, s previously suggested, we have no gold bubble, then the cost of extracting gold out of the ground should be growing roughly as the price of the metal itself, and if the margins were roughly constant in percentage terms, the prices of mining stocks should be growing roughly as fast  as the price of gold. It has been suggested that the wear and tear on the mines is adversely affecting the price of gold miners. Let's test this theory, and look at the Price/Earnings ratio of long-suffering NEM versus that of the S&P.

The sharp-eyed reader will see that until the end of 2009, gold miners were the toast of the town, but since the beginning of 2010, they suddenly became the black sheep of the investment community, and the current P/E of Newmont (around 11) is only slightly higher than that of the S&P 500 at the nadir of the stock market collapse (3/9/2009, when it was a little over 10). Indeed, while NEM's share price (adjusted for dividends) has risen by 25% over the last five years, its P/E ratio has gone from around 70(!) to the current 11.

The only at all plausible explanation  for this strangeness I have seen is that some hedge funds use gold mining stocks to hedge their gold positions. Well, actually, this does not really make sense to me -- the obvious trade at this point is go long miners (perhaps hedging with GLD), but nothing else does either, since it seems that GDX and friends appear undervalued by some 30% (and there have been massive selling in the last couple of days).

NOTE: Samsara is long gold mining stocks, and has been for quite a while (somewhat to its chagrin).