| Spring / Summer 2008 |
| Questions... |
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B_ asks... There are probably better than a dozen reasons why most stocks related to gold and silver, especially the juniors have been performing so poorly, but I'll detail the main three that by my reckoning, have had the most influence on the downward trend / collapse of many of these issues. Keep in mind however that each stock is a different, unique story, and while influenced by the general environment around it, will act different in response to the general environment. For example, a poorly run company - say a cash burning machine or a company run as a self-enrichment exercise for the CEO through multiple reverse stock splits and so on, will perform relatively poorly even in a good general environment, while the opposite will also be somewhat true. So without analyzing a specific company but only general influences, I am only describing the environment surrounding whatever the specific stock or group of stocks one may own, and not the specific story. The first is the level of general liquidity in the overall markets, from bonds to stocks to real estate to commodities. Since August of last year (2007) when the first bout of 'banking problems' surfaced and the stock market went through its convulsions, the amount of money available for lending from our institutions has been slowing shrinking. As banks have become increasingly concerned about their own fiscal health, i.e. bottom lines, they have been steadily enforcing tighter and tighter lending standards to (in order), mortgages and equity lines of credit, commercial loans and lines of credit, personal credit cards and signature loans, automobile loans and so on. This has reduced the volume and rate of money flowing through the economy, between businesses and individuals. The overall decline in liquidity is a self reinforcing cycle, one of lower profits creating slower growth which in turn creates lower profits, and on down. On top of this is the response of the Federal Reserve where they introduce liquidity to shore up failing banks or like institutions, which on the surface creates additional liquidity, but underneath has the effect due to what I'll call 'misplaced money', of further reducing available liquidity by causing commodity prices to rise (inflation). The rise in basic goods taxes both business and individual bottom lines, which both affect the amount of capital available for investing. I am sure that more than a few good stocks and positions have been sold not due to anything but individuals needing the money for either loan payments against falling asset values or to cover the simple cost of living expenses. In the order of things, food and warmth come before retirement and speculation, which is the vast bulk of stock investment. Number two on this list is my favorite; the creation of new and multiple mining entities wanting to cash in on the commodity bull market and the over issuance of paper stock across the spectrum overwhelming the existing capital available. I truly and absolutely love the irony of being a silver and gold investor to protect myself from the dilution of fiat funny money only to find myself awash in a sea of 'mining currency'. File a claim, fill out the paperwork and registrations, drill some holes, issue 40 million shares of script and your a mining company crowding its way onto the field. This is not unlike the internet stock insanity that exploded on the scene in the late 90's, with one major difference, and that is that the late 90's was riding a tidal wave of newly created money from the issuance of credit cards during the previous decade. Talk about stimulation... compare the recent government tax credits of $600 to the inntroduction of credit limits, averaging say $5000 to $10,000, on credit cards during the 90's. No, instead as mentioned above, the opposite is in fact the case, in that access to credit is being withdrawn, monetary velocity is slowing, volume is in question. So against this macroeconomic backdrop there is this issuance of excessive mining shares competing for dwindling capital, like dogs and bones, or the reverse, like a dog with too many bones if you're an investor.
The third number is the simple cost of business. To say mining is an energy consumptive business is an understatement. The very inflationary cost of commodities that mining companies are trying to capitalize on is also hamstringing them, so to speak. The raw resources, let's just say oil, needed to conduct operations and the follow on costs such as general equipment and material pricing, rising labor expense, insurance, legal and environmental billings, and so on are challenging the bottom line profit of many operations - if not outright removing it altogether beyond economic feasibility. I need go no further for an example than the recent company experience and stock action of Novagold (NG), which as a picture says all those thousands of words loud and clear. Remember, Novagold is one of the largest undeveloped gold / silver resources in the world, in a mining friendly country to boot, and had to discontinue / delay development due to excessive cost overruns. If a Novagold can't develop a mine, then what to say about Outer Moon Mining with moose pasture? Nope, I hate to say it, but when you add in all the other secondary factors such as seasonality, political risks, unregulated short selling, market manipulation, the ETF effect, bad apple CEO's with self enrichment schemes, poor company management boards, and a few more causes I am sure I am neglecting, on top of the aforementioned three, one might start to think that the mining community could not be doing much more to help the shorts. And... as it goes it is a self reinforcing exercise in that every successful short operation creates more profit for the shorts which increase their cash to, you guessed it 'short more' as the silver / gold bull is faced with more shares, higher company costs, declining profits and less cash to fight back with, in addition to his / her favorite silver / gold mining company being squeezed for access to capital as the stock price declines, and so comes to the conclusion to 'print more money'., or in other words, more shares to short. I read an article back awhile that posited that if a gold mining company really understood what they were doing, they would be stockpiling their product rather than selling it. An interesting concept; why would I want to sell something that is most likely going to increase in value every six months, and going to cost me more to get more of it? How many companies would buy back the $350 gold or $4 silver they sold in the early 2000's if they could; it'd be cheaper than mining it today I bet. What if as a true hedge against rising costs, precious metal mining companies held back 10% of their production for future expenses and started to influence the price of their product rather than be victim to it? Ah, but I digress, and of course I know mining companies need to make 'money'. Funny one, that one, wouldn't you say? Mining shares are in the middle of a winnowing as the companies that are not going to 'make it' are being sorted out by market forces. One quick and dirty way to look at the situation is simply to look at the individual silver (or gold) stocks and note which ones are going up and which ones are going down, and assume that given the current and on going macroeconomic backdrop continues on, that the overall direction of the individual stocks will continue. If a stock has been consistently been going down during this bull market, then assume the trend will continue down, and if up, then up. Granted this is a gross simplication but there is some merit to looking at things this way. Whatever company / fund has managed to appreciate or relatively perserve it's value will probably continue to do so going forward. But, an interesting side effect of all this turbulence is the fact that, particularly during these summer months, some really 'good' stocks are going down with the overall tide, to the point where it starts to challenge one's conception about what is investment about anyways, but to look for underpriced assets and buy them. Such is the argument posted recently on 321gold by Bob Moriarty in his article 'Head For The Bunkers' in which he identifies two mining companies selling at a considerable discount to what might be considered fair value. Now I have no idea how long the current weakness in the mining shares will persist, nor how far down prices will continue to slide, but I have been recently thinking that the market in the mining shares may be in a 'price vacuum' due to a convergence of influences, both specific to mining and the greater financial arena as mentioned above, and as one analyst recently described it, "Prices are beginning to reach a point of attractiveness to us." So what kind of price and company would that be? In a sentence, how about one that produces at a profit, without the need to issue more shares and willing to spend part of their gross income / profit on share buybacks if necessary to support their share value in relation to their fundamental book value. It's a wordful sentence but in my opinion that's striking somewhere close to the strategy these companies are going to need to adopt to survive.. I can think of one that fits that profile; they are out there. Anyways, so that's it, the down / upside of things in this world of our precious mining and metals.
'Market
Malaise Signals Opportunity: |
