It's been a tough couple of months for commodity investors and I count myself among that group. While the first half of 2016 worked out great, the latter half is a different story.
But gold has fallen to $1,243 which is an important price point for me. I bought some physical gold a few years back at $1,340 and then bought more when gold dropped to $1,240. So for me, $1,240 is my buy physical price. However, it's also a pretty good price for gold miners with sub-$1,000 ASIC (all in sustaining costs) for production of the yellow metal.
I will admit to being a self-professed gold bug having been investing in gold and miners since 1987. But the real appeal for me is the perception of a store of value. There is considerable debate as to whether gold is a store of anything, but I like it, it expresses wealth in many cultures and is generally universally admired for having value.
As an investor, the commodity space appeals to me because anyone can make money with good management and low costs. That turns out to be more difficult than you might think given environmental regulations, country risk and generally uncooperative operating environments. While it seems straight forward, it's anything but.
I have written about VAR Models previously. Links to all articles here. VAR Models were created by Robert P. Balan and his knowledge of commodities has helped me in my oil and gold trade. Here's the latest VAR Model on PM (Precious Metals).
But wait a minute, that doesn't look like it's working. And you are right, in this case, the model isn't working, at least not in a sense that it's predictive of the price of PM and miners.
I can assure you that this is a puzzle for both Robert and me, but Robert has added to this blog to help explain why the Gold and Silver Model appears to not be working. You can read the whole update here.
Fundamentally, the models are working, but not predicting USD movements accurately. Robert has shown us this chart to help explain asset comovements and why they may not be working now.
So if the USD is stronger than anticipated by the models, how can we now have a sense that now is the time to enter the PM trade. Before VAR models, other methods were used, and these methods are still valid.
Valuation
I like to use cash flow to compare miners. It's not a perfect valuation method as cash flows vary with leverage and the debt risk is not calculated at this level; however, most commodity producers rely on cash flow and ignore depreciation when making business decisions. I am going to compare a few miners so that you can see what I see when it comes to valuation using P/CFL as the metric.
For the complete article please visit
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