A Day in the Life of a Gold Stock Investor

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For today’s average gold stockholder, though, times have been much tougher. Some days must feel like an endless series of lost minor battles. Wednesday, January 30, 2013 was just such one.

A Day in the Life

The 30th of last month turned into a day of frustration for shareholders of gold equities.  However, conditions were in place for a nice performance.  Gold bullion, stronger overnight in Europe and Asia, opened in New York firmly up (~+15/oz).  Silver followed.  Pre-market, the quarterly US GDP report had surprised to the downside.  The dollar index was weak.

By the end of the trading day, these backdrop conditions had held, and in some cases strengthened, as an afternoon Fed policy announcement reaffirmed an uber-easy dollar policy.   As a result, the dollar weakened further against the euro, Swiss franc, pound sterling, and Canadian dollar, losing anywhere from .3% to 1% depending on the currency cross and closing near day lows against all of them.  The commodity-based CRB Index also closed at an intraday high, up 1%.

Ostensibly, everything pointed to a good day for gold equities. 

Gold equities only briefly followed suit, though. Initially, gold issues opened up nicely. They hit day highs at 10:30 am EST: Goldcorp (NYSE: GG) +1.8%, Barrick Gold (NYSE: ABX) +1.4%, Newmont Mining (NYSE: NEM) and Kinross (NYSE: KGC) both up 2.1%, and Royal Gold (NASDAQ: RGLD) + 2.4%. However after these highs, in frustrating, confounding, and hair pulling fashion, gold equities began fading and proceeded to sell off the rest of the day.

Had gold bullion sold off?  No, gold held the majority of its morning gains throughout the day. Had the stock market sold off? No, the S&P 500 did not seriously sell until after 2:00 pm.  The S&P sell-off only exacerbated the steady down move already in the sector. At the close of trading, gold shares had not simply given up the morning’s gains, but unbelievably finished solidly down: ABX -1.3%, GG -.4%, NEM -.6, RGLD -1.6%, and KGC -1.2%.

Even more depressingly, a popular ratio measure of relative value, the share price/gold price ratio, hit or hovered near three year lows for numerous issues. What looked promising ended as another gut check for gold equities. The day’s price action could only leave a gold equity investor asking “what’s next?” and then trudging onto the next day.

Of course, the relative under-performance story of gold equities is old and known (see “What’s Wrong With Gold Stocks?”), particularly the last two years.  Another strong wave has occurred the last four months. Last Wednesday was a shining example of this trend. Gold stock investors must feel isolated; their belief in the sector betrayed.

What Have Insiders Been Doing?

Have insiders moved in to buy their own supposedly cheap shares, take advantage of days like January 30, and rebuild investor confidence?  The answer appears to be no.  A search for insider purchases over the last year for the five issues discussed above gives pause. Three issues—Barrick, Goldcorp and Kinross—showed no overall insider activity over the last twelve months.  This dearth of activity includes a lack of selling as well.  But as readers of Insider Monkey know (learn why you should track insider activity), the importance of actual, consistent insider purchases is paramount.  This lack of buying is disquieting.  For Royal Gold, only a slew of selling is found.  The case of Newmont Mining produces two purchases by the company’s COO, but these occur within a tsunami of selling over the same period. 

Curiously, a search for insider purchases over an expanded period of the last five years produces little more—a handful of purchases (4) of Royal Gold from 2009 through 2011 by Director Craig Haase.  The lack of overall insider buying and the swamping by selling when purchases do occur clearly shows that insiders have not been that “into” their companies.  The paralleling of this lack of buying with flat gold equity returns is both ironic and telling.  Over the years, managements of gold miners have often talked up a glowing outlook for the gold sector; given their investing behavior, perhaps they need to tone it down.

What Can Retail Investors Do?

In light of this, how should a gold equities investor proceed? On what factor should current and potential investors focus?  At the risk of being overly obvious and elementary, the answer is the spot price of gold bullion. The efficient use of capital/cost issue is getting more attention from gold company managements but is realistically unlikely to drive share prices as savings will likely come slowly and, in the end, may only reduce the growth rate in costs. The only factor that can drive shares strongly higher would be a sustained rise in the gold price out of its near two-year consolidation. This is a simple conclusion, but one not without merit.

Take for instance, Kinross. From a revenue point of view, gold mining companies are susceptible to a quick, easy analysis as their largely singular product has clear prices established in a spot market. The case of Kinross is cleaner than that of most other miners, as they focus almost exclusively on gold. Let’s do a simple what-if analysis for Kinross by holding every other financial number constant (ounces of gold sold, taxes, etc) but raising the price of gold 10%.

Kinross reported third quarter 2012 revenue at $1.109 billion and earnings per share from continuing operations of $.20 per share.  A 10% rise in the gold price raises revenue to $1.220 billion, and via the magic of the income statement, our assumption falls to the bottom line cleanly. Earnings per share from continuing operations rise to $.30 per share, a 50% increase. Such a result would likely move the stock strongly higher.

What Is the Conclusion? 

Investment decisions by gold equity investors must be largely based on an assessment of the direction of the gold price. It’s that simple. A breakdown of gold out of its consolidation would be disastrous for gold equities; a breakout will produce obvious gains and make current prices look like screaming bargains.

This article is written by John Guba and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.  The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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