The great gold bounce, which everyone seems to be missing

THEY missed it on the way down, and they’re missing it on the way up. They, in this case, are some of Dryblower’s* best friends, stockmarket analysts. The “it” is gold, or more specifically, Australia’s biggest gold miner Newcrest Mining.
The great gold bounce, which everyone seems to be missing The great gold bounce, which everyone seems to be missing The great gold bounce, which everyone seems to be missing The great gold bounce, which everyone seems to be missing The great gold bounce, which everyone seems to be missing

Most of that opening paragraph is correct. The one questionable claim is that Dryblower has any friends, being a strong believer in Al "Chainsaw" Dunlap's advice that if you want a friend, get a dog.

As for analysts who provide investment advice, hardly any picked the slump in the gold price a few months ago, with buy tips outnumbering sell all the way down to its $US1192 an ounce bottom.

Newcrest was also a solid buy until someone from the company took a few analysts aside and whispered the truth, which went something like this: "you're wrong, we're about to rack up the mother of all losses".

Oops, said the analysts, and out came sell tips. Mega-oops said the corporate cops, we don't like private briefings, even if it is to correct a mistake that could cost investors dearly.

Which brings Dryblower to the reason for this week's topic: last week's gold price recovery and a fresh burst of sell Newcrest advisory notes from brokers.

No prize is offered for spotting the problem with the situation because gold and Newcrest are the classic example of a horse and cart. They go together, or they stop together.

So what's afoot in the gold world, and what's happening at Australia's biggest and least loved gold mining company, which made most of the country's mining analysts look a bit silly and is continuing to do so.

The original reason, which is the root cause of what's happening now, is that no one spotted the problem of a falling gold price on the carrying value of Newcrest's gold assets.

As the price of the metal fell, Newcrest was bound to make an accounting adjustment in its balance sheet and book a big paper loss, which it duly did with a $A6.2 billion impairment charge.

Last week, however, was different. The gold price rose quite strongly, closing on Friday (Australian time) at about $US1375/oz, and kept going up during European and North American trading as concern over US housing starts and speculation about the end of artificial monetary stimulus worried the markets.

By this morning, gold was back over the $1400/oz mark which, with the Australian dollar down to US90c, means the Aussie gold price is back up to $A1553/oz.

Any gold mining company that can't make a profit at $US1400/oz (or $A1553/oz) really ought to have closed its doors a long time ago.

Newcrest, even after allowing for the new "all-in sustaining" cost measure recommended by the World Gold Council, is profitable at current prices, despite its higher-than-comfortable "all-in" cost estimate for the year ahead of $US1200/oz - a number that will be dragged down as higher costs ounces are removed from the inventory through mine closures and other cost-cutting measures.

Being annoyed with Newcrest is one thing. Missing the early signs of recovery is another, and that's what seems to be happening as analysts with big name brokers trundle out sell and downgrade tips on the stock just as its price (and the price of gold) moves higher.

Members of the "sell-Newcrest" brigade include Deutsche Bank, Credit Suisse, Citi, UBS and Goldman Sachs. The overall consensus is that the stock is destined to fall from its current $A13.06 to $11.70, with some price tips as low as $7.10.

In the case of Goldman Sachs, it told clients on August 16 that it was "moving to sell" Newcrest. At the time, the stock was trading at $12.50 and according to Goldman, was heading for $9.80. The last time Dryblower looked, Newcrest had risen to $13.06 and will go higher today.

It is possible that this time the analysts are on the winning side and the gold price will stay low, or fall further, taking Newcrest back down into the sub-$10 category.

But it's equally possible that the great gold price correction of 2013 has passed, with the analysts who missed the fall now missing the revival as Asian investors soak up the gold dumped by European and North American investors.

What that means is that gold has taken on a new role. As well as being an insurance policy in uncertain times, it has now become a measure of wealth migration from west to east.

No one should rush out and buy gold on the first sign of a recovery though it has become a commodity to once again watch closely as the financial world enters the end game of artificial monetary stimulus and investors seek safe havens for their cash.

Apart from that, it would be truly delicious if the analysts had got it wrong again.

*First published in on Monday.

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