Remember the LORD for it is he who gives you the ability to produce wealth and so confirms his covenant... Deut. 8:18

Tuesday, February 17, 2009

Gold will do well - but gold miners will do better.

In this period where gold will do well, gold miners will do even better. Even if the gold price barely moves, the cost of energy (some 25% of mine operating cost) is down; the cost of labour is down; the cost of drill rigs and other equipment is down. This all means that profit margins are up.

The significant demand for their end product, gold, will remain and that product will be sold in dollars. The dollar, despite what you may read elsewhere, is not set to collapse imminently. It is the senior global currency and people have turned and will continue to turn to stronger forms of cash as this depression unfolds. While miners’ end product is sold in dollars, their operating costs will be in weaker foreign currencies – the Mexican peso, the South African rand , for example.

Bill Reid of Gold Resource Corp (US:GORO) explained how the peso has fallen from 10 to 14 against the dollar. All his costs are in pesos while his profits are in dollars . That currency play is a very significant 40% mark up in profits. The strong dollar, ironically, is another source of increased profit margins for gold miners. This outperformance by gold stocks has been in place since last October. The HUI, the index of unhedged gold miners is up some 75%, while the S&P is down some 15%. Adapted from Money Morning

Spot gold price at US 968. Gold Maple Leaf at US 1,008
UOB selling GML (1 oz) at RM 3,623
MBB selling Kijang coin at RM 3,616

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