If you thought things have been ugly for gold, then you haven’t paid attention to the gold miners, which have just been decimated.
Check out this chart going back to 2004, which shows how badly gold-related equities have done during this time (both objectively, and relative to gold).
Despite the pain, Jefferies says the miners have more “carnage” ahead.
As the price of gold declines further, gold will fall below the cost of production for these companies, resulting in years of negative cash flow.
Gold has declined by 37% from its highs in 2011. Therefore, we believe the myth that gold is a low risk “store of value” has been exposed for what it is to the latest generation of investors. Now, we fear that as understandably dissatisfied investors exit the market, selling could beget selling and send the gold price well below the cost of production. In our opinion, this risk is not discounted in gold equities valuations. In our opinion, an asset that declines by 37% in value doesn’t qualify as a “safe haven” or “store of value.” And, it never should have. Gold is a commodity whose price can rise or fall.
In conclusion, while we’d like to believe the carnage in the group is over, we don’t. With short reserve lives, rising costs, rising political risks and a stagnant commodity price, we believe an argument could be made that gold equities should trade at valuation discounts to other resource equities. Instead, they continue to garner valuation premiums. In our opinion, that continues to make the risk/reward for the North American gold group unattractive. At a minimum, we remain confident there are better values within global metals and mining.
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