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Hi Guys,
Change of tact and keen to hear other's thoughts.
(1) The below graph (sourced from a Grant Williams presentation) shows the phases of a classic bubble wave:
This pattern has been seen many times before. Here are some examples:
(1) Nikkei 225:
(2) Nasdaq
(3) US housing
(4) WTI Crude
So it can be seen that these bubbles occur in many different asset classes, markets and time frames. Back throughout time there has been the Tulip Bubble and the South Sea Bubble - human nature remains the same throughout time.
(5) Gold has also had a bubble previously, so is not an immune asset:
So. What about gold now? The below graph shows gold's recent run and I have cut the graph off at the peak gold price in September 2011 when it peaked.
That certainly looks like the classic bubble formation on the up run. If I show the full chart, it then shows the down run:
That brings us to the here and now. There are two possible paths.
(1) Grant Williams, in 2012, believed that we are at the "sweet spot" for gold:
Now ... 2 years on from his call we either still haven't moved to the true "mother of all bubbles" mania phase...
... or ... he is wrong and the gold bubble is over. That presents a dilemma for investors. What to do?
If he's right (and we're still biding our time) there isn't too much to worry about for gold / miner focused investors. Just hang tough and wait for the moon shot. So no need to discuss that possibility further.
The one investors need to think through is what if gold has peaked for this cycle (in USD at least) ?
The following chart could provide some clues:
They say history doesn't repeat ... but it sure looks like it's rhyming right about now. 1980 and 2012 look mighty similar in shape to my eye on the above chart. But then what happened? In 1980 gold had a long run of stability. Gold is also looking mighty stable from 2012 onward too, although there in not yet enough data.
So, if the bubble has burst it appears that gold could be entering a long term stable range bound phase in USD. So possibly not much downside but also not much upside for the metal itself.
But what about the miners? That is what interests me.
The GDXJ shows that the index has fallen c. 85% from its peak:
That's the definition of a bombed out sector for sure. Pessimism is as great as it could possibly be. However, if the gold bubble has burst and if 1980 is a closely rhyming analogue then this could be as bad as it is going to be for many miners in terms of their revenue downside.
There are some miners that I can now buy that are offering EV / Cashflow of c. 2-4 on an AIC basis with reserves and resources that extend many years beyond those multiples.
In addition these miners are now starting to enjoy tail winds within the sector with falling cost inputs as the industrial commodity complex unwinds and excess capacity develops.
So to me there are two possibilities:
(1) Gold bubble still to get to "mania" and the ride is far from over ... (Hmmmm not sure on that one)
(2) Gold bubble is over and if 1980 analogue holds then gold will stabilise. If that is the case the miners have over shot to the downside and I have the opportunity to buy businesses operating on historically, sector agnosticly great cash flow multiples. Once the market understands this (we've seen the worst in gold price falls) then the EV / Cashflow multiples will start to increase.
Are we starting to see this being recognised:
If the gold price stabilises here there will still be many, many explorers and developers that go tits up. There will also be a number of higher cost producers or overly leveraged producers that do the same. But if you carefully select your investments there could be monster returns coming.
This research is interesting:
So, having fallen 85% from it's peak carefully selected mining stocks may provide outsized returns going forward even if the bubble is over.
Food for thought I reckon.
Cheers
John
