Gold Forecaster
- Global Watch
Will shares catch up with
the gold and silver price?
Julian D.W.
Phillips
Gold Forecaster snippet
Feb 11, 2008
Many of you out there are frustrated
at what seems to be the very poor performance of gold & silver
mining shares over the last couple of years when compared to
the performance of the gold & silver price, understandably
so. Even the Junior's have not performed to their full potential.
Why not?
There have been several reasons:
-
1. Increasing political uncertainty
in the countries, where some of the mining companies have mines
have raised doubts about their profitability as emerging nations
have sought to increase taxes and Royalties. This does hit profit
margins, so why price the high profits expected from high prices
in, too early?
2. As doubts about the future
of the U.S. and global economy were raised and overall, all share
prices fell because they had already discounted a tremendously
rosy future for corporate America, so all share prices, including
mining shares, suffered and will do so as long as this view is
held.
3. Investors for the long-term
are usually institutions that have to produce a return for their
future pensioners or clients. These returns come from capital
gains [rosy future high capital and income expectations] and
income. With the very high P/E/ ratios we saw in the markets,
the emphasis has shifted almost completely away from income to
capital gain. Now that the harsh reality that the future is
not so bright and that the dividend-flow is hopelessly low, the
unbridled enthusiasm of former times to buy shares has dimmed
tremendously.
4. A now old-fashioned formula
starts to raise its head again as we saw interest rates rise
last year. The relationship between overall rates of return
on fixed interest securities and on shares showed that while
capital values may have fallen, the return on new money invested
rose along with interest rates. But then throw in inflation
and these rates did not look good either. So no wonder investors
are rushing in search of new homes for their money, such as cash
or short-term T-bills, rather than equities. Mining shares
suffer too in this change of investment climate. A graph of
dividend flows to interest rate returns clarifies this picture.
We do not include one here, as there are so many different
instruments to use, but overall the lower risk [or so previously
thought] fixed investments performed as well, if not far better,
than overall equities. But now toss in inflation and both begin
to look poor.
You may well now retort, "but
the mines will do better than other sector equities".
And you would be right, but when? Take a look at what
a mine will earn from last year's gold or silver market and ask
yourself what price was this based on? We are now beginning
2008, so what price will this year's income be based on? It
is the average price of gold or silver in the company's year
that will decide what the company earns after tax and from which
they will or will not pay dividends.
It is not the gold price on
any particular day in 2008. We have a tendency to assume that
today's price will be the average going forward and that the
share price should reflect today's gold & silver price.
It doesn't and savvy investors keep a watchful eye on that average
price, because it is that, that will dictate their total return
[Capital in the context of equity market conditions - Income
in the context of dividends paid].
2008
SILVER
2008
But as Investors, you have
to be careful in falling equity markets. The rosy future is
no longer in front of us [until we actually see it reappear after
the stimuli have taken effect - interest rate cuts & tax
stimulus, which may be some months in coming still], so we turn
back to the grimy reality of income earned on our investments,
which rises in importance as capital appreciation wanes.
We have to ask ourselves: -
- Will the mines pay a dividend
or are they extending the life of the mine at the expense of
dividends?
- Will dividends come in the
future, if so when?
- Will the mining companies
policies lead to capital appreciation?
It is total return we
are after and that varies with the investment climate and expected
return on investment.
You could reply, correctly
that gold & silver shares have a rosy future and will pay
rising dividends too [check company policy on their website to
confirm that]. And so they should. But the real joy of the
gold & silver shares will come when other sector shares are
looking at a dull future, when gold shares are not. What makes
us have confidence in gold & silver shares then if other
equities are looking disappointing in the face of a possible
recession?
During the fall and once equity
markets have seen the worst of their falls, good investors will
be looking around for shares that will behave well during and
after such falls. With gold & silver shares seeing an average
gold & silver prices rising steadily [much faster than rising
costs] and a long way still to go before today's gold & silver
prices are reached, let alone expected prices, gold and silver
shares are on a growth in income, path. As the reality
of the average gold & silver price turns into present income,
so gold & silver shares will be attractive.
If the gold & silver market
continues to evolve into a sector that is seen as a more than
a volatile, speculative sector into longer-term reliable performers,
contrary to other equities, we will see gold & silver shares
outperform other sector shares and rise alongside the average
gold & silver price.
But before that happens, investors
have to be convinced that the gold and silver price rises is
here to stay and that present prices of gold and silver will
hold. We believe they will!
|
"Gold & Silver
shares will outperform alongside the average prices for the two
metals!" |
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for the entire report.
Feb 8, 2008
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
321gold Ltd
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