Opportunity In Crisis Investing

It is often said that there is opportunity in every crisis. The swift and massive sell off in gold over the past few months has brought about a crisis for the gold producers especially those with weak balance sheet and high production costs that exceeded US$1,300 an ounce. The last time such a crisis occurred was in the late 1990s when gold plunged from a high of around US$850 to below US$300. The average production cost of gold then was about US$300 an ounce. Is Gold presenting a golden opportunity again for gold bugs to make a killing?

I believe the answer is “YES” for reasons as follows:
1. The fundamentals on gold have not really changed following the massive plunge in its price. Gold serves more as a preservation of wealth against inflation or financial bubbles and crashes. The financial problems in Europe, US, Japan and China have not gone away. The massive printing of money has not solved or alleviated the gigantic US debt problem, which is a time bomb.
2. Following up on point 1 above, the sell down of gold from the record high of US$1,920 to the recent low of around US$1,200, could well be paving the way for the third and bubbly phase of the gold bull market. Should this materialize, the price of gold can be expected to rise well beyond its last record high.
3. According to Thomson Reuters GFMS’s Gold Survey 2012, the average cost across the gold mining industry for mining an ounce of gold is US$727 an ounce. This cost only relates directly to mining and processing ore into gold. Operating a mine over the long-term, such that it doesn’t simply run out of ores, requires large ongoing expenditure on exploration activities such as surveying and drilling. New deposits must be found and then defined with an extensive drill programme. The site must then be prepared for production. There are also costs associated with removing waste from open pit mines to allow for future production. The average production cost across the industry has risen considerably in recent years due to the rising cost of labor, energy, raw materials, higher capex costs and environmental regulation. As a result there seems to be a natural floor under the price of gold at around US$1,300. The “all in” production cost for major producers like Goldcorp is reported to be US$1,135/oz; Newmont – US$1,115/oz; Kinross – US$1,038.oz. Economic slowdown, staff lay off, austerity measures, etc., can ease production costs but only for a temporary period.

For those interested in gold investment, they may like to see my earlier posting in this forum on 1 June 2012 on “A Case Study In Gold Investment” - www.nextinsight.net/index.php/forum/3-sg...From-Stocks?start=24

The price of gold has once again fallen below US$1,300 an oz , and many are expecting it to drop below its previous low of around US$1,200 an oz or below the production cost of many gold miners after the US Federal Reserve’s tapering measure takes effect.

Should such an event materialize, those with a positive mindset would see this as a possible money- making golden opportunity, while those with a negative mindset would see simply danger and all the reasons why one should not invest in gold.

BE A CONTRARIAN INVESTOR

All of us have this “herd instinct” behavior with the tendency to follow the crowd. Ever since we were young children, we felt the deep emotional need to be accepted by our peers. We didn't want to stand out, to be ostracized from the crowd. All our lives we learn to accept group thinking - to align our thinking with others'. So in the markets, most of us simply reflect the prevailing popular opinion to feel accepted. It becomes a part of our nature. BEING A CONTRARIAN IS EXCEEDINGLY HARD, IT FIGHTS AGAINST OUR VERY HUMAN NATURE. Thus, we tend to be greedy when stocks are high after an up leg – the worst time to buy and the best time to sell. We tend to be scared when stocks are low after a long sell off – the worst time to sell and the best time to buy. Thus, it is impossible for us to buy low and sell high, if we want to run with the crowd, to be popular and to be accepted. History clearly shows that one of the best-proven ways to make fortunes in the stock market is to become a black sheep, a CONTRARIAN investor. While this appears simple in concept, we have to consciously make an effort to change our old nature and mindset by learning and understanding market psychology and behavior in order to thrive and prosper and multiply our wealth. Market moves in great cycles, and hyper-bearishness forces the market to go to anomalous lows that never lasts and that eventually result in truly gigantic gains.

POTENTIAL GOLDEN PROFITS

The massive sell off in gold after hitting its record high of around US$1,900 in August 2011 has resulted in an anomalous pricing for gold vs gold shares. Gold was recently trading at prices of 2010 level while gold shares were trading around 2003 level. This could be due to the fear of gold miners going belly up should the gold price plunge far below the gold miners’ production cost. Unlike gold mining shares, the physical metal will always have an intrinsic value at least closer to the cost of producing the metal. The value of gold is closely connected to inflation and the strength of the US dollar. With the massive printing of money and the escalating US government debt, it is inevitable, and just a question of time, that inflation will escalate and US dollars will continue to weaken further. The price of gold would thus, have to adjust itself to reflect its true value.

For those who have been following this thread and have an interest in gold investment, they may like to get themselves familiar with the available investment products before making any investment decisions. The share prices of mining shares have fallen faster and very much more (in % term) than the physical metal and they also will rise faster and much more in a recovery. Therefore, investing in gold mining shares for larger capital gains is a much better choice than investing in the physical metal. However, the identification of good mining stocks requires much research work to be done. To reduce the risk of making error in stock selection, a good option would be to invest in the ETFs of gold miners or in appropriate gold funds where the risks are spread out among many stock holdings. Below are 2 of my preferred choices -

1. MARKET VECTORS GOLD MINERS ETF (GDX) – US$23.05 (11/10/13)
This ETF is listed in NASDAQ and holds shares of major gold producers including Goldcorp, Barrick, Newmont and others. The ETF was traded to a record high of US$66 on 8 August 2011 before falling to a low of US$22.22 [one-third its peak value] on 26 Jun 2013. Its chart and historical price data can be found in the link below –
sg.finance.yahoo.com/echarts?s=GDX#symbo...off;source=undefined ;

2. UOB GOLD & GENERAL FUND – S$1.012 (10/10/13)
This fund was launched in 1995 at one dollar and dropped to a low of 34 cts. When gold price fell below the production cost of many producers in 1999, I bought into this Fund at 42 cts as one of my core investment holdings, and gave it a time-span of 10 years to perform. I sold off 10 years later at around S$2.10 [5 x 42 cts] for a nett gain of 400%. This translated into a yield of 40% p.a. for 10 years – not a very great return but an important contributor to the growth of my investment funds of over four-folds in 10 years. The UOB Gold Fund rose to a record high of S$2.59 in 2011 before falling to a low of 88.7 cts [almost one-third its peak value] on 26 Jun 2013. In the previous major correction, the Fund also dropped to about one-third of its peak value from a high of $2.30 to a low of 80 cts before recovery.

I believe gold would test its recent bottom of around US$1,200 after the Fed tapering takes effect and gold bears and others who dislike gold would be touting for gold to drop below US$1,000 and never to recover for ages to come. After every bear market is a bull market and I believe after the coming sell down is over, gold can be expected to resume its bull market run to break above its last record high of around US$1,900 level (possibly within 5 years this time as the negative factors against gold investment are much less compelling than in 1999). The next bull run may also take gold into a bubbly phase as it scales new high before collapsing and starting a new big bear market again. This usually happened to past bubbly market. A good indication of a bubbly gold phase would be if gold price jumped by US$100 a day this time (also a positive sign to get out of the market) - Is this really possible? It certainly is a possibility. In the last bull run, gold jumped by US$73 a day in New York on 26 August 2011 to reach US$1,832.

However, investing in gold is not for everyone. Investors must be prepared to tie up their funds and wait …. for up to several years, if necessary, to see their rewards. Yes, investing in gold is a high-risk venture, especially for those who buy at the high end when the price has risen substantially and the general public and analysts are taking an interest. Gold also has a flipside of having “LOW DOWNSIDE RISK BUT HIGH POTENTIAL GAIN”, but only for those who buy towards the low end. The merits of investing in “low-risk high potential gain stocks” had already been elaborated in my earlier posting on “UNCONVENTIONAL APPROACH TO MAKE PROFITS” – see www.nextinsight.net/index.php/forum/3-sg...oach-To-Make-Profits

quote fr buffet recently

"gold ‘doesn’t do anything except look at you."

"If gold went to $1,000 I wouldn’t be a buyer. If it went to $800, I wouldn’t be a buyer."

he is not greedy when others are fearful when it come to gold.

U only buy gold and can only profit from it when someone comes in and pay u a higher price than what u initially paid for it. Other than that, it does not pay any dividends holding on to it.
Moreover buyers of gold physical gold if they opt for it, have to find proper storage for their gold.

Gold is like a reserve currency after US dollars. It's value cannot be understated. It does not pay dividends, but neither do many companies. I see gold having value after decades but I can't say the same for companies. I believe gold has a place in one's asset allocation. The key again is margin o safety and entry place. Observer2 is not advocating buy gold or to speculate I gold. He already mentioned years of waiting.

I do want gold if it fall further as a diversification since it serve as a defensive play when it is bought at the right price.

paullow wrote: U only buy gold and can only profit from it when someone comes in and pay u a higher price than what u initially paid for it. Other than that, it does not pay any dividends holding on to it.
Moreover buyers of gold physical gold if they opt for it, have to find proper storage for their gold.

Paullow – I agree with what you said. Many people hate gold while others love it for their own reasons. To me, it is just another product that one can profit from it, if we know how. It is a case of one’s mindset and I believe we should strive to have a WINNING mindset (regardless of how we achieve it), if we want to do well in life. I had also shared this in my earlier post [reproduced below for ease of reference].

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NEED FOR A WINNING MINDSET [1 June 2012]
Every investor or businessman hopes to be successful in whatever he is doing. The reality is that only a small number of them manage to attain great success and become wealthy. Many investors have been chasing after their first million-dollar-profit in the stock market. How many really succeeded in doing so? What differentiates the successful investors from the average ones? The answer has to be their mindset and the action they take in response to each situation. Below is an interesting case study on gold investment over the last decade that well illustrates this point.
A Case Study On Gold Investment
In Jan 1980, the price of Gold hit a record high of US$850 an oz. It then declined in a long 20-year bear market to around US$300 (about 1/3 of its peak value) in 1999/2000. There was little or no interest in gold towards the lower end of the bear market and the reasons for gold price remaining so depressed were –
1. The Gold Carry Trade [The gold carry trade works as follows - A central bank loans a bank (sometimes called a bullion bank) some gold. The gold lease rate is usually very low (below 2%). The bullion bank immediately sells the gold and invests in securities with a higher rate of return, such as government long-term bonds (over 5%). The carry return is the return on the bonds minus the gold lease rate.]
2. Selling By Central Banks Around The World
3. Forward selling By Gold Producers To Lock in Profits
4. Follow-up Selling: Any rebound in gold prices were quickly followed by more selling.
5. Risk Aversion: Gold investment is perceived as having very high risk and many Fund Managers would not recommend investors to have any exposure in gold. UOB also classified its UOB Gold & General Fund as a high-risk investment product. Many who were caught at the high end of the gold market had to spend years regretting their decision for getting into gold [Much like today’s many S-chips “babysitters” who got caught in the stocks at the high end during the past few years]. Gold investment yielded no return other than capital gain, if any. With the pricing of gold in US$, capital gains could be eroded by any weakness in the US$.
Under such a scenario then, are you able to see any opportunity to make money in gold or any good reason to invest in gold?
It was therefore not surprising that virtually everyone at that time avoided investing in gold except for those few people [Jim Rogers was one of them] who were able to think out-of-the-box or see beyond what most people failed to see – rather similar to today’s situation where most people condemn or avoid S-chips because of –
a) an immense fear of accounting fraud, mismanagement, cash-not-there, etc,; and
b) inability to differentiate the good from the bad companies; hence, all are considered bad and to be avoided.
What differentiates the few successful gold investors from the others? The answer got to be their positive mindsets and their wisdom and discernment in seeing opportunities when others could not; especially in situations towards the bottom end of a market cycle. Those with positive mindsets would always look for all the probable ways of making a killing taking into consideration the prevailing risks and rewards of the venture. It does not always require great intelligence to do that. Those who bought into gold then, would likely have taken into consideration the following more common positive factors, among others, in their decision making process.
1. Market Cycle: It is a well-known fact that commodity, property, stocks, economy, etc. move in cycles and in different duration. Gold had been in a bear market for about 20 years and at the end of the bear market is always a new bull market.
2. Low Risk High Potential Gain: The production cost for gold then was around US$250-US$300 an oz. Prices falling below US$300 would likely result in the closure of many unprofitable mines leading to shortage of supplies and price increases. The downside in gold price at this level could be expected to be rather limited and the upside potential gain could easily be well over 200% [see point 4 below]
3. Inflation: US Government debt had been escalating and the value of the US$ had been falling. Inflation was seen as unavoidable and supportive of higher gold price in the years ahead.
4. A New Bull Market Always Begins After The Bear Market: A new gold bull market that is accompanied by inflation has a high certainty of seeing the gold prices surpassing its previous record high of US$850. [Old record high surpassed in Jan 2009]. Stock market also behaves in similar manner i.e. if inflation is a factor and the economy recovers well, the STI can be expected to rise beyond its last record high of 3,866 points attained on 11/10/2007, in the next bull market cycle.
5. Herd Mentality Never Change: The most important fact is that prices would always be at their lowest level when the public fear or bad sentiments reached their highest level. In other word, the public (the majority) generally, would never dare or want to buy when prices are at their lowest because of the immense fear that prices could drop even lower. If they were wise enough to buy, the prices would not have dropped to such a low level in the first instance.
In 1999, UOB Gold & General Fund was selling at around 40 to 45 cts per unit. UOB Certificate Gold (One Kilo) was selling at between S$15,000 and S$16,000 a kilo. The former hit a high of $2.59 in 2010 while the latter hit a high of around S$74,000 in Sep 2011.
EVALUATION:
The market cycle for gold is a lengthy one. The duration of the bear market of 1980 to 2,000 was around 20 years. With the current bull market for gold already over 10 years old and prices have risen over 5x since the year 2,000, the big money to be made from gold may well be over. For gold to rise 100% from the current level of close to US$1,600, its price would need to climb to US$3,200 – certainly a daunting task and also considering the unattractive risks-to-rewards and waiting time required; besides, there are other investment products offering very much superior and faster returns.
LESSON:
This case study illustrates the need for investors (especially those looking for great returns or to make their millions in investment) to adopt a positive mindset and strive to see beyond what the general public is seeing. Those who are able to do this would likely reap great rewards. However, one needs to bear in mind that high returns are usually accompanied by high risks. Thus, much homework needs to be done and priority be given to taking precautionary measures in reducing one’s investment risks to the lowest possible level [eg. buy only very grossly undervalued stocks with little or no debt, also paying dividends; etc.]
From: www.nextinsight.net/index.php/forum/3-sg...From-Stocks?start=24