Short Sellers Beware: Gold "Must Go Higher" - Edelson Institute
(Kitco News) - The cost of acquisitions has now fallen below the cost of exploration for major miners, and gold prices could benefit from a dwindling resource supply, this according to a recent report from the Edelson Institute.
Sean Brodrick of the Edelson Institute said that if gold prices don’t advance higher from here, many miners are likely to go out of business.
“If companies go out of business, and the only ‘new’ gold ounces come through acquisitions, that means gold supply will go down. And as surely as dawn follows night, prices will go up,” Brodrick said.
His comments come as Barrick Gold recently announced a merger with Randgold, forming the world’s undisputed largest gold miner.
According to the report, the cost of finding gold through exploration has climbed eight-fold since 2007, and gold miners are using up the resources in the ground.
“I mean, gold isn’t a renewable resource. That’s why Barrick bought Randgold. Barrick’s gold reserves fell by 25% in the last year alone!” the report.
Brodrick added that the Gold Bugs Index, a basket of leading miners, is at the most discounted level since 2015.
“There’s only one time that miners have been this discounted, price-wise, since 2002. And that was in the depths of the bear market in late 2015,” he said.
The VanEck Vectors Gold Miners ETF (GDX) has fallen by 21% since January, while gold has declined 7% in the same period.
“Surviving gold miners are becoming lean, mean, digging machines. They’ve cut all the fat. The good ones are making money, even at today’s prices. And when prices go higher, well — select miners will see their profit margins widen like the Grand Canyon,” the report said.
Brodrick added that on a price-to-earnings (P/E) basis, miners are very attractive as investments.
“Again, the only time gold miners were cheaper on this basis was in the depths of the bear market in 2015,” he said.