The price of gold has been taking a battering in the last couple of months. Earlier this year it tested the previous high of $1,365 per ounce (U.S. dollars) reached in both July 2016 and 2017, but since then the trend has been down, observes Gavin Graham, contributing editor to Internet Wealth Builder.
The Commitment of Traders (COT) report shows the derivative (futures and options) positions of investors in various commodities, including gold. The Managed Money category shows the net (long minus short) positions of large speculative traders, primarily hedge funds, and has had a very tight correlation with the price of gold over the last few years.
As speculative traders have the ability to use high levels of leverage to increase the size of their positions, they have a very strong effect on short-term moves in the gold price.
The other important point to notice about the Managed Money traders, however, are that they are always wrong at turning points, being most bearish when the price is about to take off and bullish when it's already risen sharply.
There has always been a large seasonal element in gold prices, with almost the entire average gain (99.7%) occurring between the beginning of July and the end of February. For the remaining four months of the year, gold has been flat. This is due to the pattern of buying by Indian and Chinese investors.
With inflation rising, government deficits mounting, tariff wars looming, and political uncertainty at multi-year highs, gold's traditional function as a safe haven in times of trouble should be more attractive.
There is, however, another specific cause of weakness in gold miners, namely the decision by Vanguard to restructure its $2.3 billion Vanguard Precious Metals and Mining Fund and rename it the Vanguard Global Capital Cycles Fund.
This involves reducing the percentage of mining stocks from about 80% to 25%. Given that the Vanguard fund is double the size of the next largest precious metals fund in the U.S., this has had a major impact on the larger gold miners that the fund held.
Of course, this is a classic sign of capitulation at exactly the wrong moment. Vanguard has done this once before. In May 2001, it dropped the word Gold from the name of this fund, just before gold rose 650% in the next decade and gold mining stocks gained 1,600%.
Agnico Eagle (AEM) is a senior Canadian gold mining company that operates eight mines in Canada, Finland, and Mexico. It also has exploration and development activities in each of these countries as well as in the United States and Sweden.
After topping $62 in early July, the share price went into a slump, reflecting what was happening with the price of gold. Gold production was 404,961 oz. at an all-in sustaining cost (AISC) of $921 per oz.
More importantly, the company raised its production guidance for the year. Two major new projects in Nunavut (Amaruq and Meliadine) are coming on stream in 2019, which should increase production substantially.
Agnico remains the best-managed gold major. Increases in production in politically safe jurisdictions. It should see overall output reaching 1.65 million oz. by 2020. It has a low debt to equity ratio, at 28%.
Franco-Nevada (FNV) is a gold royalties and streaming company with a large and diversified portfolio of cash-flow producing assets in Canada, the U.S., Australia, Africa, and Latin America. Its portfolio is widely diversified geographically and by mineral, with the intention of deriving 80% from precious metals and 20% from oil and gas and other minerals.
This has been the best performing gold stock over the last five years. The shares hit an all-time high of $110.18 last November before retreating to the current level as the price of gold declined.
Franco-Nevada bought the rights to all of the gold and silver stream from the massive Cobre Panama copper and gold mine for $356 million in March and contributed $70 million to the construction cost. It expects to contribute another $160-180 million to construction for the rest of 2018 to complete its $1 billion contribution. Cobre Panama is expected to start production in 2019.
Franco-Nevada also bought an oil and gas royalty portfolio for $101.8 million in the Permian Basin in Texas in February and has just committed $220 million to buy the royalties for the SCOOP and STACK fields in Oklahoma, with a commitment to spend $100 million a year for the next three years.
The quarterly dividend was increased earlier this year by a penny to US$0.24 a quarter (US$0.96 per year). That equates to a yield of 1.3%. It was the 11th consecutive year the company has increased its payout.
Goldcorp (GG) traded at over $19 early in the year but has been in a slide for the past several weeks.
Its portfolio includes mines in Canada, the U.S., and Latin America. It is the second largest global gold miner, with annual production for 2018 estimated at 2.5 million oz. at an AISC of $800/oz. (all +/-5%).
In the second quarter, Goldcorp produced 571,000 oz. at an AISC of $850/oz. That compared to 635,000 oz. at an AISC of $800/oz. in the same period last year. This partially reflected the ramp-up of production at the Eleonore and Cerro Negro mines in Quebec and Mexico.
Goldcorp recorded a loss of $131 million ($0.15 per share, figures in U.S. dollars). This was primarily due to $178 ($0.20 per share) million of non-cash foreign exchange losses. Operating cash flows and adjusted operating cash flows for the three months to June 30 were $158 million and $310 million respectively compared to $158 million and $320 million in 2017.
CEO David Garofalo has set a 20/20/20 target of reducing AISC costs by 20% while increasing output and reserves also by 20% by 2021. Such projects as the Penasquito Leach program in Mexico and the Musselwhite materials handling project in Canada are on time and on budget to achieve these ends, while the company's exploration programs are proving successful.
Goldcorp remains a Buy. It is one of the largest gold stocks by market capitalization and should benefit from any buying by investors.
