Oct 31

Newmont Reports Q3 Adjusted Net Income of $249 Million

Gold Price Comments Off on Newmont Reports Q3 Adjusted Net Income of $249 Million

Newmont Mining Corp. (NYSE:NEM) announced its Q3 earnings, commenting that its net income attributable to shareholders from continuing operations came to $210 million, or $0.42 per basic share.

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Sep 18

Newmont CEO Denies Barrick Merger Rumours

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Reuters reported that Gary Goldberg, CEO of Newmont Mining Corp. (NYSE:NEM), has claimed there is “nothing” in the works in terms of a merger between his company and Barrick Gold Corp. (TSX:ABX,NYSE:ABX).

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Sep 11

Premier Gold Mines Acquires Cove-McCoy Property

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Premier Gold Mines Ltd. (TSX:PG) announced it has closed the acquisition of a 100-percent interest in the Cove-McCoy gold property, in Nevada, from Newmont Mining Corp. (NYSE:NEM). Premier paid $15 million for the property.

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Mar 04

Gold Output Won’t Meet Expectations, Say Major Producers

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Bloomberg reported that according to Barrick Gold Corp. (TSX:ABX,NYSE:ABX), Goldcorp Inc. (TSX:G,NYSE:GG) and Newmont Mining Corp. (NYSE:NEM), global gold output is set to decline, largely because miners have cut spending and revised their mining plans.

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Oct 10

Junior Gold Mining Risk

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Investing looking for leverage to Gold Prices often turn to the junior miners…

SO THE RISK
trade is on again, says Brad Zigler at Hard Assets Investor.

You can tell that by watching the Gold Miners Ratio, a fraction that compares the relative weight of the Market Vectors Gold Miners ETF (NYSE Arca: GDX) to its younger sibling, the Market Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ).

The "senior" fund comprises 30 established Gold Mining producers, while the "junior" portfolio includes 60 issuers, mostly companies engaged in the exploration and development of gold properties.

The miners’ ratio uses GDX’s share price as its numerator, while the market value of GDXJ is the denominator. Presently, the ratio’s in the 1.60 area, which is a historic low. Simply put, the price of the junior fund has been rising relative to the senior portfolio since July.

Hence the risk.

Over the summer, investors hoping for leveraged gains were much more willing to suffer the vicissitudes of early-stage Gold Mining ventures. And why not? The junior fund, GDXJ, handily outperformed the producer portfolio and even the price of bullion itself this year.

That doesn’t necessarily mean the GDXJ portfolio was the best way for investors to obtain gold exposure.

In fact, when overlaying a modest allocation of gold to a balanced portfolio of stocks and bonds, it doesn’t really matter what kind of product you use. Junior stocks, producers’ shares and Gold Bullion itself all foster the same portfolio return. Only the risk undertaken is different.

A fund is only as "good" as its component stocks. There’s a vast difference – along several dimensions – between the stocks making up the junior portfolio and those comprising the producer product.

By comparing the top five constituents of each portfolio, we can get a better sense of the internal forces at work.

GDX – Gold Miner

 

YTD
Return

Annual
Volatility

Downside
Semivariance

Sharpe
Ratio

Beta vs.
Gold

Portfolio
Weight

Barrick Gold Corp.

23.4%

31.5%

18.4%

.74

1.38

16.4%

Gold Corp. Inc.

14.8

33.7

19.2

.44

1.47

11.5

Newmont Mining Corp.

36.8

31.8

17.3

1.15

1.32

10.9

AngloGold Ashanti Ltd.

18.3

31.9

18.1

.57

1.33

5.9

Kinross Gold Corp.

6.3

35.1

20.5

.17

1.44

5.2

Mean

19.9%

32.8%

18.7%

.61

1.39

 

By and large, there aren’t real "standouts" among the top tier of gold producers. Most portfolio metrics, save for their Sharpe ratios, are fairly uniform. That shouldn’t be too surprising for established companies.

But a couple of the metrics probably bear explanation…

  • Downside semivariance is the standard deviation of daily losses. It’s often said that volatility is a two-edged sword: Upside moves are considered just as risky as downturns;
  • Downside semivariance accounts for only the "bad" volatility. A skew in the semivariance metric from the stock’s volatility midpoint gives an investor a better sense of the security’s real risk. Note, for example, that the downside semivariance of Kinross Gold Corp. (NYSE: KGC) is more than half its annualized volatility. KGC was a stock more likely to have "down" days than "up days";
  • Sharpe ratios express a stock’s risk-adjusted excess return; that is, its gains over a risk-free investment, factoring in its volatility. A ratio above 1.00 represents an excess return greater than the stock’s risk;
  • Here, each stock’s beta, or relative variance, is set against gold’s. Positive readings indicate a directional correlation to bullion. A beta over 1.00 indicates the degree of excess volatility over gold’s.

Now compare and contrast.

GDXJ – Junior Gold Miners
 

 

YTD
Return

Annual
Volatility

Downside
Semivariance

Sharpe
Ratio

Beta vs.
Gold

Portfolio
Weight

SEMAFO Inc.

131.2%

49.1%

25.5%

2.67

.04

5.3%

Allied Nevada Gold Corp.

84.8

48.5

28.5

1.74

1.86

4.3

Alamos Gold Inc.

33.8

40.4

22.5

.83

.10

3.7

Coeur d’Alene Mines

11.7

49.6

29.8

.23

1.89

3.5

Silver Standard Res.

2.4

39.3

23.3

.06

1.43

3.4

Mean

52.8%

45.4%

25.9%

1.11

1.06

 

There’s a lot more variability in the juniors’ performance, which is reflected not only in the spread of returns, but also in their Sharpe ratios and betas.

Clearly, China’s SEMAFO, Inc. (TOR: SMA) was an outlier. Its beta may bear explanation, though; the number is so low because the stock tends to "zig" when gold "zags". In large part, this is a currency effect, as SEMAFO and Alamos Gold Inc. (TOR: AGI) trade in Canadian Dollars.

Notably the junior miners’ volatility, as well as their downside semivariance, is uniformly higher than that of the larger Gold Mining producers. And taking a slice off the top, each miner group leaves us with this: Yes, you’ll likely get a better return from juniors in a bull market for gold, but you’ll pay for it with higher volatility and downside risk.

The question you have to ask yourself is whether you’re nimble enough to lift your portfolio exposure to these high-speed stocks before they can have a deleterious effect on your wealth…

Get the safest Gold Bullion at the very lowest costs – cash price only, no leverage – by using world No.1 BullionVault

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Sep 30

Gold Mining vs. Gold Bullion

Gold Price Comments Off on Gold Mining vs. Gold Bullion

What’s been the better portfolio addition this year – gold miners or Gold Bullion?

SOME LUCKY INVESTORS have had a golden touch this year. Literally, writes Brad Zigler at Hard Assets Investor.

It’s because they actually touched gold that they became such standout investors. Gold Bullion attained yet more nominal highs this week, making bullion one of the best-performing assets of the year for US Dollar investors.

As of Wednesday, gold has notched a better-than-17% return compared with the breakeven performance for large-cap stocks reflected by the S&P 500 Composite Index and the 5% capital appreciation in the Barclays Capital Aggregate Bond Index.

Gold Bullion isn’t without its detractors, however. As gold’s price rises, so too does the volume of the ongoing debate between mining stock aficionados and bullion fans.

Gold equity advocates point to the leveraged returns obtainable through shares, reveling in the outsized gains earned by gold stock indexes this year. One such benchmark, tracked by the Market Vectors Gold Miners Index ETF (NYSE Arca: GDX), has risen 22% year-to-date.

Mining stocks magnify gold’s moves because of the enormous influence the metal’s market price has on a company’s earnings. Once bullion advances beyond production costs, price changes flow directly to a producer’s bottom line.

The names populating GDX’s underlying index are some of the world’s biggest and best-known producers, such as Barrick Gold Corp. and Newmont Mining Corp. Nearly 90% of GDX constituents carry a market capitalization of $5 billion or more.

Another index-tracker, the Market Vectors Junior Gold Miners Index ETF (NYSE Arca: GDXJ), mirrors the performance of companies engaged in the exploration and development of mining properties. The appeal of these so-called juniors – or miners with an average market capitalization of $850 million – is their potential for high growth or as acquisition targets. That appeal has translated into a 33% gain for the GDXJ portfolio this year.

Taking a stake in the GDX portfolio is akin to buying blue-chip stocks, while the GDXJ portfolio exhibits the risk and reward characteristics of a venture capital investment. Gold Bullion fans therefore highlight the two-edged nature of leverage as a potential liability. And they have a point.

Over the past five years, the downside semivariance of the Philadelphia Gold-Silver Index – volatility’s "bad half" in short – has been twice that of London Gold Bullion prices.

Bullion fans also point to the purity of a solid Gold Investment. Through direct investment in metal, one can avoid both equity market influence and management risk. But is the true measure of a Gold Investment just its return? Its volatility? Since a Gold Investment is rarely the sole asset in a portfolio, how does it fit in with other components?

In short, what’s been the better portfolio addition this year – gold miners or Gold Bullion?

The so-called Sharpe ratio of a financial asset measures the risk-adjusted payback for each product. The higher the Sharpe, the better the investment on a risk-reward basis. And because, over the last 5 years, the risk (aka volatility) of holding gold was less than the return realized, the metal’s Sharpe ratio is higher than those of the mining stock ETFs.

Yes, top-line performance – that is, year-to-date returns – have clearly been the junior miners’ strong suit this year…rising at nearly twice the pace of bullion in 2010. But the standard deviation of the junior miners’ daily returns was just a shade under that gain. Meaning exploration and development companies have been riskier than bullion in 2010.

In fact, the annualized volatility of the juniors was greater than 38%. Gold’s was just shy of 18%. Because of the miners’ close correlation to bullion, however, there isn’t any diversification benefit derived from the extra risk. In short, miners don’t provide any "zag" beyond gold’s "zig".

This becomes readily evident when Gold Investments are overlaid on a portfolio made up of equal parts large-cap stocks (represented in our analysis by the SPDR S&P 500 Trust) and fixed-income securities (as tracked by the iShares Barclays Capital Aggregate Bond Index Fund).

The outcomes here may seem counterintuitive at first. Because, despite the greater stand-alone returns obtained by mining share funds this year, Gold Bullion provided the best diversification benefit when used as a portfolio component. The benefit derives from gold’s more negative correlation to stocks, and its nearly flat correlation to bonds.

Of course, it’s not likely that most investors would hold too large an exposure to gold. Neither is it likely that portfolios would be constantly rebalanced. A more common allocation to gold would be 5-10%, and monthly rebalancing too, is more than adequate for most portfolios. And when gold exposure is reduced to 10% and the portfolio rebalancing frequency dialed down to monthly, composite returns become nearly identical, no matter what Gold Investment is selected. The essential difference between the gold products performance as portfolio constituents lies in their volatility effect. Bullion dampened volatility better than either of the miners funds.

The takeaway from all this is that Gold Mining shares, as a class, are clearly more volatile than bullion. Sometimes, their higher risk yields compensatory rewards and sometimes not. But there’s really no reason to buy mining shares if you can’t get a diversification kicker – a higher portfolio return that justifies their higher volatility.

In sum, despite the stellar returns of junior miners in 2010, this has been a "not" year. Gold stocks just haven’t paid off as well as Gold Bullion when used as a portfolio building block.

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