Panic merchants generate golden opportunity
Gold is in free fall, having fallen about $US100 or 6 per cent in the past month to US$1578 ($A1530) an ounce and, as with most situations where there is panic, there are opportunities for money to be made, a fact that was emphasised by the sector experts your intrepid columnist spoke to.
One area to make money is in explorers that are low cost and have their foot on prospects that are considered high grade. For these miners, every tonne of ore processed contains a relatively large amount of gold, making it more profitable.
One stock that came up a number of times was ABM Resources (ABU), which has a high-grade "Old Pirate" deposit in the middle of the Northern Territory.
"It's very high grade and low capital cost, and should still survive and get product into development even if the gold price continues to weaken," says Alan Martin, a portfolio manager with Colonial First State who invests in small resources companies.
Warwick Grigor, a principal of the stockbroker and gold specialist Canaccord Genuity, is also a fan of ABM and its "Old Pirate" prospect and explains why explorers won't be affected by a falling gold price to the same degree as producers: “Exploration should not be as vulnerable because for the gold producer it affects profits. Whereas, the explorer is taking ground at $5 an acre and turning it into $50 million an acre. The leverage on discovery and proving an ore body is far greater than a $50 movement in the gold price.” Both say that the producers with the lowest costs will be able to ride the storm best, which means you should be looking for producers with costs lower than $1000 an ounce.
But big money can be made from gold miners that produce bulk tonnage at low grade if there is a turnaround in the gold price. This is because these operations are more leveraged to the moves of the yellow metal.
A big advantage some companies have is that they have sold their gold forward at higher prices. One example is Saracen Mineral (SAR), which has tenements and gold deposits north-east of Kalgoorlie. This miner sold roughly 30 per cent of production forward for a few years at just under US$1700 an ounce.
Says Grigor: "Saracen was criticised a month ago when it did the deal because it sold gold forward but now looking it's looking smart.
"You should be getting rid of high-cost gold producers and feel comfortable holding those with lower costs and good growth profiles like Saracen."
One gold producer struggling is St Barbara (SBM), whose shares have fallen about 20 per cent in the past few days and are trading at multi-year lows. Investors are worried that St Barbara paid a big price for Allied Gold late last year because its costs exceed $1300 an ounce.
What's happening with the gold price?
Gold will always have an emotional hold over investors' hearts because it's not priced on fundamentals.
It is a speculator's dream because there is no yield on owning gold, no earnings, and virtually zero use for the productive capacity of an economy.
If there are any fundamentals, there is the cost of finding the stuff, which seems to be increasing by the day.
Yes it is symbolic. Try giving your bride or groom a copper wedding ring. And yes, it is considered by many a store of wealth that could replace the current standard, which is the US dollar.
Much of the doubling of the gold price in the past five years has been due to a concern that the US dollar has been printed to excess in the wake of the ballooning US trade deficit and its sluggish economy.
The printing of the greenback has taken the form of "Quantitative Easing" or "QE", which is central bank slang for propping up banks' balance sheets in the hope that they'll lend some of it out. Radar views it as similar to smoking – it's good at the start, but you need more and more of it to get even close to the initial effect.
A trifecta of concerns suggesting that gold is losing its lustre have occurred in quick succession: Last week the maverick trader George Soros was rumoured to be selling his exchange traded fund holdings, which presumably included gold-based ETFs.
Second, it emerged from minutes of the Federal Open Market Committee (FOMC) that the US Federal Reserve may be trying to get off its addiction to QE.
Third, there is talk of a big hedge fund in trouble causing widespread selling in metals and oil.
Warwick Grigor says the thing for most investors to remember is "not to panic": "The gold price is relatively stable compared to other commodities. Why people get into a tail spin over $50 moves, I'm not sure.
"If you're a trader and you own a high-cost gold producer you might consider selling, otherwise if you're taking a longer-term view you're looking for buying opportunities."