Will Shares Catch up With the Gold and Silver Price?

By: Julian D. W. Phillips | Fri, Feb 8, 2008
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Many of you out there are frustrated at what seems to be the very poor performance of gold & silver mining shares over the last couple of years when compared to the performance of the gold & silver price, understandably so. Even the Junior's have not performed to their full potential. Why not?

There have been several reasons: -

  1. Increasing political uncertainty in the countries, where some of the mining companies have mines have raised doubts about their profitability as emerging nations have sought to increase taxes and Royalties. This does hit profit margins, so why price the high profits expected from high prices in, too early?

  2. As doubts about the future of the U.S. and global economy were raised and overall, all share prices fell because they had already discounted a tremendously rosy future for corporate America, so all share prices, including mining shares, suffered and will do so as long as this view is held.

  3. Investors for the long-term are usually institutions that have to produce a return for their future pensioners or clients. These returns come from capital gains [rosy future high capital and income expectations] and income. With the very high P/E/ ratios we saw in the markets, the emphasis has shifted almost completely away from income to capital gain. Now that the harsh reality that the future is not so bright and that the dividend-flow is hopelessly low, the unbridled enthusiasm of former times to buy shares has dimmed tremendously.

  4. A now old-fashioned formula starts to raise its head again as we saw interest rates rise last year. The relationship between overall rates of return on fixed interest securities and on shares showed that while capital values may have fallen, the return on new money invested rose along with interest rates. But then throw in inflation and these rates did not look good either. So no wonder investors are rushing in search of new homes for their money, such as cash or short-term T-bills, rather than equities. Mining shares suffer too in this change of investment climate. A graph of dividend flows to interest rate returns clarifies this picture. We do not include one here, as there are so many different instruments to use, but overall the lower risk [or so previously thought] fixed investments performed as well, if not far better, than overall equities. But now toss in inflation and both begin to look poor.

You may well now retort, "but the mines will do better than other sector equities". And you would be right, but when? Take a look at what a mine will earn from last year's gold or silver market and ask yourself what price was this based on? We are now beginning 2008, so what price will this year's income be based on? It is the average price of gold or silver in the company's year that will decide what the company earns after tax and from which they will or will not pay dividends.

It is not the gold price on any particular day in 2008. We have a tendency to assume that today's price will be the average going forward and that the share price should reflect today's gold & silver price. It doesn't and savvy investors keep a watchful eye on that average price, because it is that, that will dictate their total return [Capital in the context of equity market conditions – Income in the context of dividends paid].


2007 High 841.75 417.624 573.555 841.10 418.486 572.449
2007 Low 608.30 314.904 467.492 608.40 314.113 468.018
2007 Avg 696.4312 347.5928 507.4446 695.3865 347.0122 506.8339

Jan High 927.50 466.549 627.750 924.50 465.157 625.973
Low 840.75 424.806 573.343 846.75 427.824 576.452
Avg 887.7841 450.9704 603.7984 889.5955 451.6780 604.1252


2007 High 1582.00 753.333 1107.900
2007 Low 1167.00 584.124 859.852
2007 Avg 1338.3538 668.4969 977.0264

Jan High 1676.00 840.863 1132.900
Low 1493.00 752.141 1016.340
Avg 1596.1136 810.1963 1084.5682

But as Investors, you have to be careful in falling equity markets. The rosy future is no longer in front of us [until we actually see it reappear after the stimuli have taken effect - interest rate cuts & tax stimulus, which may be some months in coming still], so we turn back to the grimy reality of income earned on our investments, which rises in importance as capital appreciation wanes.

We have to ask ourselves: -

  1. Will the mines pay a dividend or are they extending the life of the mine at the expense of dividends?
  2. Will dividends come in the future, if so when?
  3. Will the mining companies policies lead to capital appreciation?

It is total return we are after and that varies with the investment climate and expected return on investment.

You could reply, correctly that gold & silver shares have a rosy future and will pay rising dividends too [check company policy on their website to confirm that]. And so they should. But the real joy of the gold & silver shares will come when other sector shares are looking at a dull future, when gold shares are not. What makes us have confidence in gold & silver shares then if other equities are looking disappointing in the face of a possible recession?

During the fall and once equity markets have seen the worst of their falls, good investors will be looking around for shares that will behave well during and after such falls. With gold & silver shares seeing an average gold & silver prices rising steadily [much faster than rising costs] and a long way still to go before today's gold & silver prices are reached, let alone expected prices, gold and silver shares are on a growth in income, path. As the reality of the average gold & silver price turns into present income, so gold & silver shares will be attractive.

If the gold & silver market continues to evolve into a sector that is seen as a more than a volatile, speculative sector into longer-term reliable performers, contrary to other equities, we will see gold & silver shares outperform other sector shares and rise alongside the average gold & silver price.

But before that happens, investors have to be convinced that the gold and silver price rises is here to stay and that present prices of gold and silver will hold. We believe they will!

"Gold & Silver shares will outperform alongside the average prices for the two metals!"

This is a snippet from the recent issue of the weekly newsletter from: www.GoldForecaster.com.

For the entire report, please visit www.GoldForecaster.com.



Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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