“The Worst Is Not Over” Says Top Gold Analyst
By Alessio Rastani
Last week I met one of the world’s top gold analysts at Morgan Stanley, which is one of the biggest investment firms in the world.
Edward Schultz (not his real name) probably knows more about gold and mining stocks than anyone I know. He travels around the world visiting gold mines from Australia to Africa to South America.
I asked Edward about the crash in gold and silver prices and whether he would consider buying precious metals at this point.
“What we have right now is a classic ‘bottom of the market’ behaviour from people.” Edward said. “There is simply no appetite for buying gold or mining stocks. But that also tells us that right now is a great opportunity to buy them at bargain prices!”.
However, I was totally surprised by what Edward told me next:
“But… gold mining companies have not yet began to hedge against losses.”
“Wait a minute,” I could not believe what I was hearing. “You are saying that after the nearly 67% drop in gold mining stocks since 2011, mining companies have not yet even began to hedge?”
“No. They have not.” Edward said with a smile. “The hedging that goes with capitulation has not even started.”
“So if gold prices go lower, which they might, then mining companies will start hedging… and that will make their prices go much lower?”
“Yes.” Edward agreed. “If gold goes lower, that will happen.”
To fully understand the consequences of a fall in gold prices, take a look at this chart of the big gold stock fund (GDX):
Gold stocks are right now at $22. We are near the all time 2008 lows of $15.83. That might put a floor in gold stocks, but there’s a catch…
You see, gold mining stocks have something called an “All in Cash Cost” (or ACC). This is the cost of producing one ounce of gold which includes labour, equipment, drilling etc. PLUS capital, admin and exploration expenses.
Now here’s the rub:
If a mining company’s “all in cash cost” or ACC is LESS than the price of gold, it can stay in business and may remain profitable.
However, if the ACC is MORE than the price of gold, either it will have to cut costs very quickly or go out of business.
For example, some mining companies like Anglo Ashanti and Newcrest have an ACC of $1700 and $1900 respectively. This makes them very costly and subject to huge risks.
Edward was quick to point out that some gold miners will have to close shop. You should only invest in quality gold mining companies.
I’ve already pointed out some of my favourite gold and silver mining stocks with very cheap ACCs: Yamana Gold (AUY), Silver Wheaton (SLW) and First Majestic Silver (AG).
Edward told me his own favourite gold mining stock was Eldorado Gold (EGO). Eldorado has an “All in Cash Cost” of below $400 per oz. This means even if gold falls to $1000, this company will be profitable.
As you may know, I also like this mining stock so much that I asked our trusted broker ETX Capital to add Eldorado Gold to their platform.
I agree with Edward that a phenomenal opportunity to buy gold and mining stocks is around the corner. Gold will probably revisit $1200 before heading to $1100. And then we will pick up the bargains.
In the meantime, it pays to be patient.