Gold vs. gold miners

[market timer]

Miners have been reporting very poor earnings lately as gold prices have fallen. It occurred to me that with many miners falling into negative earnings territory with gold below $1200, and with others explicitly tying dividends to gold prices (e.g., NEM), that you could probably model the value of gold miners using call options on gold prices. Has anyone looked at this? Like, if gold stays at $1200, will some go out of business? If gold falls and stays below $1000, does most of the industry fail to make a profit?

I wonder why this industry was doing so well in the years prior to 2008 when gold was less than $1000, but struggles so much now with gold above $1100. Was there just massive investment in projects that assumed a high gold price?

[MachineGhost]

Miners have been reporting very poor earnings lately as gold prices have fallen. It occurred to me that with many miners falling into negative earnings territory with gold below $1200, and with others explicitly tying dividends to gold prices (e.g., NEM), that you could probably model the value of gold miners using call options on gold prices. Has anyone looked at this? Like, if gold stays at $1200, will some go out of business? If gold falls and stays below $1000, does most of the industry fail to make a profit?

I wonder why this industry was doing so well in the years prior to 2008 when gold was less than $1000, but struggles so much now with gold above $1100. Was there just massive investment in projects that assumed a high gold price?

I think you're really asking about the "all in costs" for gold mining.  I think it was around $1200 average last I remember.  Below that, then yes the miners will start incurring accounting losses and eventually shut down producing mines.  It will become a game of creative destruction as those with the lowest "all in costs" will survive and eventually acquire the hemorhagging producers.

They struggle now because input costs have gone up compared to pre-2008.  I don't know how the recently declining price of oil factors into this.  Right now the majority of miners still have their reserves on the books set at higher prices.

OTOH, the miners priced in gold are now as low as they were at the secular bottom for gold stocks in 2000.  So its time to start paying attention, especially now that gold itself is perhaps a month or two away from bottoming.

[babysquirrel]

How, pray tell, do you know when gold is bottoming ?

[MachineGhost]

How, pray tell, do you know when gold is bottoming ?

I have friends in high places.

[buddtholomew]

How, pray tell, do you know when gold is bottoming ?

I have friends in high places.

...and guess what, they don't have a clue either.

[dualstow]

To see the bottom, seems like one would need to have friends in low places.

[Mark Leavy]

And when you gaze long into an abyss the abyss also gazes into you.

[Mike59]

I dabbled in miners and silver on and off from 2010 until this year. It's a zero sum game. Youll get lucky in some cycles and double or triple your winners. In the next cycle youll get smacked around and lose half to three quarters of what you invested. I dont go anywhere near them anymore as temtping at is it is, and now is really tempting to bottom fish. Its as close as youll get to gambling.

Mike Maloney did a great video about how the miners have lagged bullion, the trend of underperformance actually started in the 1970s:

http://m.youtube.com/watch?v=_jV9iZtxnPo

Personally Im quite pleased with my permanent portfolio and the 25 percent alloc to gold bullion.

[ochotona]

I placed an order to buy some mining shares. Not many, just to get started, and for fun. NEM, ABX.