John Kaiser: Get Ready for a Washout in Gold Stocks

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What’s going on with gold stocks right now? Are they in a bear market and is right now a good time to buy? In a recent interview with Financial Sense Newshour, resource analyst John Kaiser covers a wide-range of issues related to gold and gold mining stocks. First, he addresses why it’s nearly impossible to make a profit mining gold right now:

“[T]he big shock that made the news last year was the capital cost and operating cost explosion that has been going on for the past five years…Nick Holland from Gold Fields last year put forth a statistic saying that every year the costs have compounded 10 percent; that’s substantially higher than the two-to-three percent CPI that we’ve seen during the last five years.  So the problem for gold is if you had a project which was marginal at $900, you would think that today at $1600 it should be fabulously profitable.  Well, in fact, if you compound the cost at $900, 10% for five years, that’s 60% higher, so all of a sudden you’re up at $1400-$1500.  And Barrick dropped a bombshell in January when it said that its worldwide average total cash cost and that includes the depreciation of capex is $1500/oz.  Well, we’re pushing $1500 today.  That means it’s really impossible to make money mining gold at least with new projects.”

With the explosion in costs, John also explains how companies are now being forced to take huge writedowns, which is further hurting the industry. In general, he says “we’re probably heading into a dreary period between now and September where there will be a complete lack of interest in the resource sector and there may be some gradual capitulation selling where somebody says, ‘Well, I like this other stock here at 4 cents a lot better than this one here at 3 cents so I’m going to dump my entire position, capture the tax loss and reposition in this other one.’ That sort of wash-out I think we’re looking for in the coming months.”

In case the above happens, John says to be “prepared to endure lower values and be prepared to buy more. If you’re uncomfortable with these lower values, you need to move on. These companies are going to have a difficult time raising the money to advance their projects during the next 12 months, so they will be going sideways.  There may be a predatory takeover bid that doubles the prices, so that might be a reason to just hang on to them.”

With that said, the place he is currently looking right now for buying opportunities is the U.S., given the lack of exploration in the last 20 years due to high environmental regulations. In terms of the junior mining sector, for example, he says, there’ll probably be some fabulous discoveries that take place and “I would say Nevada is probably the most likely place and it will have replication possibilities that allow other juniors to come in there and look for something similar.  And there can be a case made that of the 200 million ounces of gold found in Nevada since 1960, there is at least that much if not more that remains to be found largely under gravel cover.  And somebody starts finding something like that and you have an exploration boom erupting in our own backyard.  And hopefully, the whole environmental movement will realize that as the US dollar in the long run ceases to be the world’s reserve currency, it would be good to have gold production in the United States going forward.”

To listen to the remainder of this interview or read the full transcript, CLICK HERE

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