Gold vs. Miners

According to the gold gram chart vs. the XAU, gold mining stocks haven't been this undervalued in decades.

This would lend a certain amount of credence to the inverse of the Net Present Value curve, where gold miners as companies should perform strongly when the discount rate is at either extremity as opposed to other forms of business which perform strongly when the discount rate is moderate. What's missing is gold miners advancing as a whole against the gold price in an extreme low discount rate environment.

The reason why gold miners are generally undervalued with the gold price is that there is a burgeoning short interest in the shares of gold miners, and holders of leveraged positions built up since 2007 are inclined to defend those positions by re-instating those bets. Through the use of derivatives contracts, they can use these leveraged positions to advantage when the discount rate rises. And in the case of GBN.V shares, in utter complete defiance of the fundamentals.

Now, the discount rate had actually declined overall, though these bets keep coming from sell-side brokers. Its all here, they use whatever tool they can muster to their advantage. Front running gold price corrections by having the company release news only during those times, flooding the bids with millions of shares, having the company perennially issue more and more shares every quarter, and will probably have the company reverse split the shares in a bid to scuttle the share price.

Why they should have so much say over how GBN.V is managed is beyond me, unless of course the CEO is holding the equity swap position himself and was somehow cajoled into taking such a position, and like a complete idiot, took the bait. This kind of thing is not unique to GBN.V, but is probably a pervasive phenomenon throughout the gold sector, especially in the junior companies. The banks can't control the advance in the gold price, and they can't weigh against the bigger miners any longer, so all that's left are the small companies which they inveigle against and likely to produce the same results. It boggles the mind, and yet ABSOLUTELY ZERO guidance from the company on this issue. And yet, all it will take is for a small amount of buying at market to upset the whole applecart.

(I would say that it should be mentioned as part of the MD&A that the company may be required to release news according to the dictates of the holder of an equity swap position, as illogical as that may sound. The risks in mining is not so much whether they can produce the gold, but the short interest held against the company through whatever means controls the process, and all of the leverage goes into these positions.)

Now, if you look at the large cap and mid cap producers, they are very well indexed with the price of gold and may seem fully priced, but if you measure the indeces against the gold price, they are clearly underperforming:

source: http://goldmoney.com/precious-metals-or-mining-stocks.html

In the GDX vs. Gold chart, the Wilder's ADX, which had been scraping the bottom for many months, has just turned up with a green line crossing over the red line:

supersize: http://www.flickr.com/photos/11747277@N07/4804073889/sizes/l/

stockcharts.com

You can see how the value of gold miners in gold has decreased, while the gold price has increased with this next chart, a testament to the fraudulent nature of Canadian stock markets, where naked short selling is the rule, and at the same time, a taboo subject:

supersize: http://www.flickr.com/photos/11747277@N07/4804147039/sizes/l/

stockcharts.com

-F6