After a decades-long slump, the bulls are ready for some prime-time gold profits.
Back in the early 1980s, gold was all the rage. The US had abandoned the gold standard and it was on the move from under $100/oz in the early 1970s to hitting $682 in September 1980.
Our local exchange was having a great time with literally dozens of listed gold mines that were suddenly printing money. This fever lasted for at least a couple of years, even as the gold price started to slip, with gold closing the 1980s at around $400/oz. Even at that price mines still made great profits, thanks in part to their fixed cost base.
Back then most listed gold mines were single shaft affairs, not the large conglomerates we see today. The plan was to mine the shaft at a profit, pay chunky dividends and then close when the costs were higher than the price; and with the boom in the price, mines could mine for longer.
But then the 1990s came along and two things happened. Firstly, the gold price continued sliding, closing the decade at around $300/oz. The second issue was the start of the trend of mining conglomerates owning multiple shafts and mines, which meant that buyers of these mining stocks would own not only highly-profitable shafts, but also loss-making ones – as well as greenfield and brownfield mines.
But the old-timers never forgot the heydays of the early 1980s and kept on punting gold, even as it was a horrid investment – whether in the metal itself or in a gold mine. The running joke among us newbie traders in the late 1990s and early 2000s was that the only time to buy a gold mine was when closing a short, and for much of the late 1990s and early 2000s that was the only time I ever bought a gold mine.
Unbeknown to us at the time was that the gold price was bottoming out at $250/oz in late 1999. This coincided with the Bank of England selling about 395t of gold over 17 auctions from July 1999 to March 2002, at an average price of about $275. These sales, undertaken by then Chancellor of the Exchequer, Gordon Brown, remain controversial as we now know for certain that this happened at the bottom of a decades-long cycle.
Gold then peaked again in August 2011 after S&P reduced the US sovereign credit rating from AAA to AA+ and gold traded briefly above$1 800/oz. But by late 2015, the yellow metal had fallen to just above $1 000/oz and many, me included, wondered if gold would ever be a worthwhile investment.
And then 2020 arrived. And brought with it the coronavirus pandemic. Gold is now trading at around $1 820/oz. But the real story is the gold miners.
The gold miners index has broken out of a multi-decade sideways channel and is at all-time highs over the last few months. This is helped by a weaker rand against the dollar, as the fixed cost base of the gold miners are paid in local currency. They are now again printing money. Most people that I speak to refer to Pan African Resources and AngloGold Ashanti as the best top-tier gold miners, and DRDGOLD and Harmony as the best second- tier stocks in this category.
But we need to remember the lessons of
previous decades: Nothing lasts forever and when
this bull finally leaves town (as all bulls eventually
do), we need to move on. But for now, this is gold-
bull time and there is money to be made.