More on the hottest topic of the day, the collapsing Gold price. As our readers know, we have not been overly positive on Gold in the short term. The trade is very crowded, volatility too high at these levels (suggesting something is “wrong”) and speculation high. A slightly more positive view and good insight on Gold, by Gresham’s Law;
It may be just me, but it seems like the majority of market participants are terrible at dealing with one of the rudiments of life as a human being; time. It is almost as if the herding man lives in constant contempt for his former self and dogmatic surety about his current convictions (whether they relate to past, present or even the future). If this hunch happens to be true, then it doesn’t take much to see the folly – for surprise surprise; as time passes the much-loved present conviction joins the realm of past regrets. So to thwart the arrogance of the gold bubble-top callers and the long-for-the-sake-of-being-long speculators here I outline why you, they and — hell — I might just buy that forthcoming parabolic move in gold.
Apologies if I sound like a broken record – but nothing about the future is obvious. However, given that the typical 21st century futureologiest has a tendency to look at the past to guide his actions – gold may be regarded as particularly perplexing. For whereas equities have never (ever) met the widespread expectation that characterises its top (i.e. a ‘permanent plateau’ of abundant delight – a cornucopia), gold has frequently met the widespread expectation that envelopes its market top; hyperinflation. Gold, widely regarded as the objectification of worriment, has no precedent of not meeting the expectation held at its market top. Unlike most other assets on the radar of the speculator, the currency price of gold has often never returned to the levels traded on the eve of the bull run.
For value investors, gold miners represent excellent value as operating companies. For macro investors gold equities are essentially a gold derivative, allowing long term leverage to the structural uptrend in gold. Yet for any gold miner investor, the volatility of this asset class has been a defining feature of this sector, all the more so given the backdrop of a consistent long term gold rally. Gold miner volatility reached manic levels earlier this fall as the GDX (a liquid ETF tracking senior gold miners) reached its twelve month high and low within 18 trading days of each other. If silver is the devils metal, the gold miners are the devil’s equities. None the less, we believe investors need to see through this volatility and focus on the facts and probabilities as they develop their 2012 game plans. In addition to a fundamental analysis of the GDX, we also deconstruct the volatility and correlations of the GDX to help frame the inherent risks in this security.
Value. We believe that the GDX can trade to $80/share by the end of 2012, a ~50% return from current levels Our argument for substantial upside falls on the following four points:
1. Compelling valuation – senior gold miners stocks are trading at multiples last seen in the fall of 2008. We also believe the GDX is trading at a significant discount to its intrinsic (DCF) value.
2. Cash flow generation is strong and accelerating. After years of capital expenditure, elimination of top line hedging and steadily rising gold prices, cash flow growth is accelerating.
3. Discount rates are poised to decline as the operational risk profile of these companies is rerated.
4. Return on Invested Capital (ROIC) could soar from high single/low double digit levels today to 30% under even a moderately bullish gold forecast.
Commodities getting slammed today. Margin calls hitting the metals. Let’s see if we get some real panic as crowded trades have attracted way too many short term momos. Mind you, Paulson Advantage is down 50% this year, and that’s before the plunge in Gold we are seeing today. Wonder the price action if the HFT start sniffing Paulson unwinding gold at some stage, but of course, HFT provide liquidity…
Long term metals charts below;
Equities continuing the slow pain slide. SPX futures reached the “Coordinated” levels. The effect is now gone, and people are now shifting focus to the commodities space. We are seeing sharp sell offs in particularly silver, but also gold and oil. There seems to be many gold lovers out there, and they are feeling the pain at the moment. With such crowded trades, it usually wipes out many, even “smart” guys. Silver fell through the 30 Usd easily, now let’s wait for gold to take out 1600. As we wrote the other day, “we would love to see Gold down to 1550, just to see how it breathes”. The short term bottom in Gold is approching as Roubini has been calling the Gold crash all day long on Twitter.
On December 9, 2011, beginning at 11:01:16, there were two anomalous and probably unrelated events in the symbols PDLI and BAC. Both events featured a large amount of trades from the BATS exchange. The PDLI event showed trade and quote price oscillations similar to an algo we previously documented in Natural Gas Futures. The BAC event was a blast of approximately 800 trades per second that sustained for 77 seconds in a row. The total number of trades that occurred in BAC in this short period of time equaled about 30% of all trades over the entire trading day.
“Since the early autumn here in the Northern Hemisphere gold has failed to make a new high. Each high has been progressively lower than the previous high, and now we’ve confirmation that the new interim low is lower than the previous low. We have the beginnings of a real bear market, and the death of a bull.” (Gartman)
Gold is certainly a crowded trade, although the trend is intact. With so many bulls, and Paulson still big long Gold, things could get interesting….
Charts with perspective below;
Prospects for a rapid increase in IMF firepower to cope with the eurozone crisis have receded after the Japanese government and the Bundesbank set tough conditions before making contributions, reports the FT. On Tuesday Jun Azumi, http://ftalphaville.ft.com/thecut/2011/12/14/798511/doubts-raised-over-imf-firepower-and-uk-contributions/
Morgan Stanley has resolved its legal conflicts with bond insurer MBIA, ending a long-running dispute tied to guarantees of mortgage securities that will result in the bank recording a $1.8bn pre-tax loss,http://ftalphaville.ft.com/thecut/2011/12/14/798471/morgan-stanley-books-1-8bn-loss-to-end-mbia-dispute/
Franco-German hopes for a sweeping new treaty to bind the region’s economies more closely came under strain on Tuesday as several EU leaders warned of difficulties pushing a far-reaching pact through their national parliaments, http://ftalphaville.ft.com/thecut/2011/12/14/798121/eu-treaty-hopes-come-under-strain-2/
Opec ministers were edging towards a decision to keep oil output broadly steady at their meeting on Wednesday, the FT reports, moving to heal the profound differences between Saudi Arabia and Iran that led to the collapse of the previous meeting in June. The oil cartel painted a sanguine picture for the energy market heading into 2012, http://ftalphaville.ft.com/thecut/2011/12/14/798101/opec-nears-agreement-on-oil-output/