Thank you for the excellent commentary at the moment. Please could you tell me how much further the Gold Miners could appreciate, in your opinion. They have already come quite a long way this year but money still seems to be going in to the big miners such as Barrick and Newmont. Yet when the stock market suffers big pull-backs- the Gold Miners can often be whipsawed

Eoin Treacy's view

Thank for this question which may be of interest to the Collective. The lesson commodity investors quickly learn is they are much more volatile that regular stocks. The gold mining sector went through a crushing bear market and is only now recovering. Sentiment towards miners is still fragile and has contributed to volatility.

That generally means buying on strength, while tempting, is not usually the best strategy. However, buying on weakness requires faith in the bull market hypothesis. The more significant setbacks you sit through and buy into, the greater your conviction in the efficacy of the strategy. That makes it exceedingly difficult to sell when there is clear evidence of a peak.

Gold is still rallying in just about all currencies. Oil prices have contracted significantly. Government are printing money at a record pace. That is positive for gold and mining profit margins are expanding. Against that background significant setbacks can be viewed as buying opportunities.

Over the last month some of the bigger more established miners have developed short-term overbought conditions. Some consolidation is likely but the continued strength in gold may limit potential downside

The NYSE Arca Gold BUGS Index/gold ratio is only now in the process of breaking a lengthy downtrend. Miners are not investing in new greenfield sites and are not aggressively ramping up exploration. They are therefore in a very favourable position to offer leverage to the gold price for the first time in 20 years.

Interestingly, the NYSE Arca Gold BUGS Index/Nasdaq Composite Index shares a similar pattern.

This article kindly forwarded by a subscriber highlights how thin the physical market is at present and how there is a clear risk of double counting of bars. Here is a section:

Why is all of this important to the SPDR Gold Trust? Because, Bank of England vault gold held by commercial banks ultimately comes from central banks through gold lending or is for delivery back to central banks. Which means that when GLD holds 400 oz gold bars at the Bank of England with Bank of England as subcustodian, it is holding gold bars that either came from gold lending transactions or are ultimately going back to the lending central banks.

If the SPDR Gold Trust is now holding leased central bank gold as part of its gold holdings, this raises the issue of double counting, a situation in which the same gold bars are claimed by two distinct parties, the central bank which lent the gold and still accounts for it on its balance sheet, and an exchange traded gold-backed ETF (GLD) which thinks that it has title to those same gold bars since they were ‘allocated’ to GLD at the Bank of England.