Mark Bristow remembers a time not so long ago when gold "was
not even considered a commodity that one should invest in."
That was in 1995, when his gold mining companyRandgold
) was just getting off the ground in West Africa.
By 1999, CEO Bristow recalls, gold had sunk to near $250 an
ounce. "People were questioning whether it was a precious metal
and hard asset."
It was a time in which investors had dot-coms, not gold on
their minds. But the dot-com bubble burst. Gold prices turned
higher, rising to an eventual peak a year ago that was 650% above
their 1999 lows.
Gold has since corrected and trades around the $1,700 mark.
But, analysts say, despite the consolidation, a more than
decade-long advance may yet have room to run.
The yellow metal faces geopolitical uncertainties. But low
interest rates and fear of inflation, due in part to quantitative
easing, give gold a chance to show its strength as a
"Gold plays different roles at different times," said futures
analyst Ira Epstein of the Linn Group.
Like the dollar, gold often acts as a safe haven, moving
counterpoint to rising and falling stocks. But, rather than a
safe haven, it's trading as a risk asset now -- parallel to the
stock market, analysts say.
"More than likely, gold is going to be tied to equities and
will move in the same direction for the time being," said Travis
Rodock, senior market specialist with Efutures.com.
Silver traded to a high of $37.48 an ounce in February, well
below last year's peak near $50. It's outpaced gold
percentagewise, but has lately lost a bit of its shine, last
trading around $32.
"Silver is a poor man's gold and at the same time, it's an
industrial metal," Epstein said.
The white metal responds well to words like "stimulus
program," especially when "infrastructure" is added, he says.
Gold and silver prices are obviously a key factor in miners'
profitability. The more prices rise, the more miners can leverage
their fixed costs, especially as production cranks up.
"If you can extract it cost effectively, it could be a
lucrative business," said Deutsche Bank analyst Jorge Beristain.
"You're essentially mining money."
But the stocks, like the commodities they are linked to, are
volatile ones. IBD's Mining-Gold, Silver & Gems group ranked
No. 2 of 197 industry groups last week. When prices corrected
over the summer, the group was near the bottom of the barrel.
Top gold mining stocks, both in earnings and stock
performance, include Randgold,Agnico Eagle (
),Royal Gold (
) andAllied Nevada Gold (
Standouts in the silver sector includeSilver Wheaton
(SLW),Couer D'Alene (CDE),First Majestic (AG)andHecla (HL).
As for gold miners, said HSBC Securities analyst Patrick
Chidley, "I think the stocks are very cheap and trading on
multiples we haven't seen in decades."
Not For Sissies
Randgold's Bristow says mining isn't profitable "unless you
manage it as a business, not just a gold mine."
Randgold's team settled on Mali in French West Africa to set
up operations. It was off the beaten mining path, but one in a
dozen regions worldwide where deposits were thought to top 3
A native of South Africa, Bristow learned French. His team
built ties with locals as they opened mines.
"Today we represent 9% of the GDP of Mali," he said. "We're
the biggest taxpayer and one of the largest employers outside
While gold might be a safe haven at times, Mali is anything
but that these days. Islamist extremists have taken control of a
large region in the north of the country. The situation presents
"a real challenge to Mali," Bristow says, but adds his mines are
in areas "a long way from the conflict."
Randgold has managed through floods, a coup in Mali and a
civil war on the Ivory Coast.
"Certainly mining is not for sissies," Bristow said.
All of this figures into mining costs, on top of costs like
fuel, labor, equipment and corporate overhead. Many of those
costs are rising.
Miners often mark their break-even costs at $500 to $700 an
ounce. But Beristain says "they're only talking about mine-level
But those break-even costs typically don't include things like
corporate and administrative expenses, taxes, interest on debt
and maintenance "to just keep the lights on," he said.
"We think the true cost of gold mining is about $1,300 an
ounce," Beristain said.
In Latin America and Africa, he adds, it is standard practice
for big mining firms to build roads, power infrastructure,
schools, hospitals and housing.
"When you start adding all those extra things on, it
diminishes returns to stockholders," Beristain said.
Gold mining stocks have tended to lag the performance of the
gold price, prompting some larger mining companies to look at
more shareholder-friendly ways of allocating their cash,
Beristain says. Instead of reinvesting back into operations, some
are boosting dividends and buying back stock.
Newmont Mining (NEM) tied its dividend to the rising price of
gold. Hecla put in place a similar dividend policy, linking it to
the silver price.
One reason costs have gone up for some miners is that they've
been mining hard-to-get, lower-grade ore while prices are high
"to maximize the value of their long-term ore deposits," says
"If you don't mine low-grade deposits when prices are higher,
you'll likely never mine it," he said.
Randgold plans to stick to higher, easier-to-mine grades,
hoping to bring costs down from around $700 an ounce to as low as
$500 over the next five years.
It aims to produce 1.2 million ounces by 2015, about 40% above
this year's estimated production.
"If gold went below $1,000 we would re-look at our plans,"
Gold retreated 19% in the nine months through May, but held
above $1,500 an ounce. Prices lagged through July, then started
HSBC's Chidley calls the correction a "midsummer
misunderstanding." The reason: misguided beliefs that the global
economy might be on the mend and wouldn't need more quantitative
"Gold is an insurance policy, basically," he said. "The market
lost its conviction that gold was necessary as a portion of your
But the U.S. economy did need a boost after all, and the Fed
relented with more quantitative easing. That gave gold a boost,
Chidley says, because every time more money is printed, the
likelihood of future inflation increases.
"It's like filling up a dam," he explained. "At the moment the
dam is holding back the water. But at some time the dam could
burst. Think of inflation as the level of the water downstream
from the dam. The threat of inflation increases every time you
top up the money supply using QE."
$2,100 Price Target
Gold prices have recently been more clearly aligned with
stocks than with currency moves. Still, central banks in other
developed nations are either engaged in or looking at monetary
stimulus, which could boost inflation risk.
Greece is already on the eurozone dole. Spain is filling out
the forms. Japan is trying to stimulate its economy by lowering
Gold demand is also getting a boost from central banks in
Asia, says Chidley, many of which are raising their gold
holdings. Consumers in Asia and other emerging economies,
meanwhile, are buying more gold for investment purposes.
"We look for gold to move up above $1,900 in this quarter and
average $1,850 next year," Chidley of HSBC said.
Beristain says Deutsche Bank expects gold to hit $2,100 next
year. The rise will be fueled by additional central bank action
and supply constraints in South Africa on the heels of miner
Silver will "piggyback on gold's strength," Deutsche Bank
It recommends mining stocks Barrick Gold for its attractive
valuation and dividend policy, and market laggardKinross Gold
(KGC) for a potential turnaround.
Also on Deutsche Bank's recommended list are silver mining
stocks Coeur D' Alene andPan American Silver (PAAS), both seen
benefiting from rising silver prices and stabilizing costs.
Rodock of Efutures.com sees gold trading sideways until
inflation becomes more of an issue.
"Once we start to see inflation as a result of monetary
stimulus pushed into the marketplace, gold will definitely be an
attractive asset to own. Eventually, we'll see prices higher than
at levels right now," he said.
Epstein thinks that gold needs a substantial boost of its own
before prices move markedly higher. That might mean a currency
shock, he says, or a clear turnaround of world economies.
"It doesn't have either of those going for it right now," he