Gold a Value Trap?
Patrick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Gold was one of my first topics when I started my Foolish musings. In December I introduced you to Newmont Mining (NYSE: NEM), down 29%, and Compania De Minas Buenaventura SA Buena (NYSE: BVN), down 2%. At the same time, the metal itself is down 8%, as measured by the SPDR Gold Trust (NYSEMKT: GLD). In February I wrote about Barrick Gold Corp (NYSE: ABX), down 23% since then.
So all of my picks are losers, and only one is doing better than the basic metal . Maybe I'm a lousy stock picker. Maybe my pro-gold thesis is wrong, and the whole sector is a value trap. Or maybe my picks represent even better value because of their depressed prices.
Maybe I'm a lousy stock picker. I have previously admitted that I only pick winners about half the time, but usually my winners win more than my losers lose. Newmont and Barrick are among my bigger losers lately, outside the norm, so...
Maybe my pro-gold thesis is wrong. Many, including other Fools, have argued that gold is experiencing a bubble, that it's come too far too fast. Certainly, Europe's superb juggling skills, and America's remarkable ability to continue to float debt, have kept gold moving jerkingly downwards, but it's not been a suicidal sleigh ride (at least since December, it broke $1900/oz last summer).
In fact, when you consider the fundamentals (and I'll admit I did not consider what I'm about to discuss back in December), gold's slide is understandable.
India has historically been the world's largest consumer of gold, some 20% of world production, but thanks to its rubber currency, gold priced in rupees has hit new highs, and sales have recently fallen 50%. 50% of 20% is 10%. And since December, gold's fallen something like 10%!
So had you and I been living and investing in India, my thesis would have been right, because of India's horrible fiscal policies. The government prints money, or it hides the printing of money through off-balance sheet bond issuance. It strangles its economy in regulation.... wait, is that India? Or Europe? Or the US?
India's just the one furthest down the path of fiscal destruction, and if their problems, or Europe's, were to force investors there to sell gold at some point could put further pressure on dollar denominated dubloons.
On the other hand, India could follow past patterns and come back into the market with a vengeance. And, since America and Europe are playing the same games as India with their currencies, but on a larger scale, further monetary mayhem seems certain at some time in the future.
So short term, the abeyance of the latest crises in Europe and America, and India's newfound frugality when it comes to jewelry, bode ill for my shiny precious. However, since all the world's governments seem determined to make the same mistakes, and since Barrick, Buenaventura, and Newmont continue to pay good dividends and to have strong cash flows with which to weather the downturn, I'm comfortable holding on!
SlowThought has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.