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SWOT Analysis: After Underperforming Gold Since 2006, Gold Miners Have Begun to Outperform


  • Gold analysts and traders are bullish on the metal for the third-consecutive week, the longest run since February as geopolitical tensions continue to support the safe-haven demand. In addition, the weekly Bloomberg survey shows analysts are the most bullish in seven months after rockets were fired from Gaza before the 72-truce expired, and Ukraine reported it attacked a destroyed portion of a Russian military convoy entering Ukraine.
  • Klondex Mines reported strong second-quarter results, its first full quarter of operations. For the quarter, Klondex generated $7.4 million in free cash flow, setting it apart from both junior and senior peers, which have struggled to generate free cash flow at current gold prices. The company also reported earnings per share of $0.04 on record revenue generation. Analysts’ expect costs to decrease even further in the third and fourth quarters on lower mine-development costs and higher production from long stopes.
  • Midway Gold updated its mineral resources estimate at its Spring Valley project in Nevada, boosting gold grades by 20 percent to 0.55 grams per tonne. It also boosted total measured and indicated resource by 102 percent to 4.37 million ounces of gold. Barrick Gold has agreed to carry Midway to production in exchange for a 75-percent stake in the project. Similarly, True Gold received funding for up to $120 million from Franco Nevada and Sandstorm, which fully funds remaining development and construction at the Karma project in Burkina Faso. 


  • Gold demand in China shrank in the second quarter as consumers in the largest global gold market purchased fewer bars, coins and jewelry amid a clampdown on corruption. For the three-month period ended June 30, China purchased 192.5 metric tonnes of gold, a 52-percent decrease from a year earlier. Fortunately, the decrease has been offset by the lack of physical gold exchange traded fund (ETF) liquidations. In India, official statistics show significant drops in consumption, which are questionable given the government has allowed multiple grey market participants to thrive.
  • Ernst & Young, in its latest quarterly report on mergers and acquisitions (M&As) for the mining sector, shows M&A activity subdued in the second quarter despite a strong deal pipeline and sizeable private capital funds sitting on the sidelines. The report highlights 112 deals worth $9.5 billion for the quarter, or a 21-percent decrease in deal volume from the previous quarter, 41 percent lower than the second quarter of 2013. Ernst & Young explained that commitment to capital discipline, together with lack of urgency given the lack of competition for assets, are reasons for the reduced deal volume.
  • Centamin reported second-quarter earnings that were nearly cut in half as a result of lower mine grade at its Sukari mine in Egypt. Earnings fell 49 percent to $32.6 million from a year earlier, while revenue fell 24 percent for the same period.


  • Oppenheimer’s analysts believe gold stocks can soar more than 40 percent from current levels. As the chart below shows, after underperforming gold since 2006, gold miners have begun to outperform as of late, breaking out from the long-term downtrend. Voicing similar comments was Dennis Gartman, highly respected and neutral gold market commentator. In his letter, Gartman asserts that the force keeping gold prices depressed may be well near defeat, leading a wave of big fund managers back into the sector.

  • Paul Singer, founder of the $24.8 billion Elliot Management Corp., said in a letter to investors dated July 28, that gold presents a “unique and not really very expensive” trading opportunity, anticipating a rise in gold prices on mounting inflation concerns. Not surprisingly, 13F reports published this week by all major hedge funds show John Paulson’s Paulson & Co., the largest investor in physical gold ETFs, held its stake over the period, while Soros Fund Management increased its exposure to gold miners.
  • Macquarie U.S. Economics research argues underlying inflation continues to be dependent on wage growth, which it expects to accelerate, consistent with reduced labor slack. According to its research, current wage growth dynamics appear comparable to the second half of 2004, a period soon followed by accelerating wage growth. With 10-year government bond yields setting yearly lows this week, any acceleration in wage growth and inflation would translate into substantial negative impacts to real yields, and a strong tailwind for gold prices.


  • A new PwC report shows the productivity of Australia’s open-pit mining equipment is so poor it only ranks above African mining. After peaking in 2007, Australia’s productivity has trended down consistently, and now sits behind North American, Asian and South American productivity levels.
  • Imperial Metals’ shareholders are considering a class action lawsuit against the company as a result of the disastrous tailings breach at its Mount Polley mine in British Columbia. Meanwhile, Alaska’s senior U.S. senator asked the U.S. Secretary of State to reiterate “concerns about large scale mining in British Columbia, which has the potential to adversely affect downstream fisheries and communities in Southeast Alaska.”
  • China and Russia, which are already making bi-lateral agreements to trade their currencies and bypass the U.S. dollar, are progressing to challenge the dollar hegemony in world trade. Interestingly, the two countries hold the smallest proportions of their total foreign-currency reserves in gold. This may explain why China, and especially Russia, have made significant investments to increase domestic gold production. Russia is likely to overcome Australia as the world’s second-largest producer of gold.  The positive side is that gold produced will be purchased by their central banks and not released into the open market.

Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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