Gold Mining Fundamentals

I have been of the opinion that there was a better than even chance of gold taking a correction after Washington finished its Kabuki dance on the debt deal.  I have been wrong on that thus far, and maybe the dumb money that has piled in over the last month is not as dumb as I assume it is.

This money is coming in globally, as a simple look at gold’s ratios to major currencies shows.  This is not just a USD event.  The world is losing confidence in the system.  Gold does not have any more running room on the upside with[out] making a ‘channel buster’ move.

Be that as it may, NFTRH was prepared for the last gold miner bull run out of June, and it was prepared for this recent pullback as things got too hot.  What I did not expect was today’s show of strength amid markets that are losing support and looking downright scary.  Folks, this seems like panic; global panic.  But it is not panic that makes gold mining fundamentals.  It is bottom line operating costs as they relate to the product, gold.

Among many other things, the Au-CCI (equally weighted commodities) ratio does a good job of tracking this ratio, or the ‘real’ price of gold.  I have a thing about not giving away NFTRH’s keys to the kingdom, so I am going to put up the chart and let you reflect on the ‘real’ price of gold (top) vs. HUI (lower panel) in the interest of perspective.

There is a lot of bitching and moaning out there about gold stock under performance vs. the metal.  This is generally bogus, but it does what it is supposed to do and gets impatient people fed up.  Just as a declining ‘real’ price of gold drags unfavorably on gold mining bottom lines, so too does a rising one help bottom line operational metrics.  And yes, this applies even after factoring in the notion that gold mining companies can be some of the most poorly run companies on the planet, with a fair amount of incompetence and a lot of antagonism toward investors through stock dilution and the like.

Hey look, the markets are fun again now that we got [the] debt thing behind us.  Things could be worse.  😉  The remainder of 2011 and 2012 promise to be really, really interesting.