The gold miners' stocks are rocketing higher again, multiplying wealth for smart contrarian traders who bought them low in recent months. But after such a blistering surge, traders are naturally wondering how much farther gold stocks can run. Is it time to realize gains, or buy aggressively for greater gains to come? This critical question can be answered by looking at fundamentally-derived gold-stock price targets.
Many analysts shy away from offering price targets, with good reason. Divining precise future outcomes in volatile markets is all but impossible. Prevailing stock prices result from the chaotic interplay between sentimental, technical, and fundamental drivers. And an effectively-infinite array of variables can affect each one, making forecasting stock prices a fool's errand. Nevertheless, this exercise is absolutely necessary.
Like many things in life, the markets are an inherently-unpredictable probabilities game. Even if fantastic research suggests some outcome has 80% odds of coming to pass, there's still a 20% chance it won't. But a lot of traders read forecasts as if they were advertised as a 100% chance, ridiculing the analyst if events don't play out that exact way. Weather forecasters struggle with this psychological bias all the time.
Most market price targets emerge from technical analysis, looking at chart patterns to extrapolate trends into the future. Price action considered over time indeed reveals a great deal about traders' sentiment and likelihood to keep on buying or selling the way they have been. But as any honest technician will quickly admit, technical analysis is often highly subjective. Price charts are interpreted like Rorschach tests.
So for gaming gold-stock price targets, I prefer a fundamentally-based approach. Fundamentals in the stock markets revolve around underlying corporate profits. And all stocks ultimately gravitate towards some reasonable multiple of their companies' earnings. This is true in every sector including the gold stocks. And from a profits-fundamentals perspective, the gold-mining industry is exceedingly simple.
Gold miners painstakingly wrest gold from the bowels of the Earth, and then sell it for prevailing gold prices. Thus their profits are merely the difference between the gold price and their production costs per ounce. So once you know this industry's cost structure, it's easy to calculate how much gold stocks are likely to rally with any given gold-price increase. Gold's price is their overwhelmingly-dominant earnings driver.
The world's major elite gold miners are all included in the flagship GDX Market Vectors Gold Miners ETF. Like all public companies, these GDX component stocks report their financial results to investors once per quarter. These comprehensive reports are a treasure trove of fundamental data that includes production-cost information. Crunching this for all the GDX components yields representative industry-wide metrics.
For reasons I've never been able to fathom, the gold miners tend to report 4 to 7 weeks after quarter-end. So the Q4 data isn't all in yet, but I hope to publish a comprehensive analysis on it in the coming weeks. The latest full quarterly data from the gold miners is still the third quarter of 2015's. And during that quarter the elite major companies included in GDX reported average all-in sustaining costs of $866 per ounce.
All-in sustaining costs are a relatively-new construct the World Gold Council introduced in June 2013. Unlike traditional cash costs, AISC include all the costs necessary to maintain and replenish existing production levels. This includes mining costs, corporate-level administration, exploration, mine development and construction, remediation, and reclamation. AISC include everything necessary to sustain gold output.
Gold has been deeply out of favor for years thanks to the Fed's surreal stock-market levitation sucking capital away from alternative investments. And that gold antipathy climaxed in mid-December the day after the Fed's first rate hike in 9.5 years when gold plunged to $1051. That was a dark day for the gold stocks, which languished just above mid-November's 13.3-year secular low per the HUI gold-stock index.
This entire sector was trading at stock prices last seen in July 2002 when gold was trading near $305 and had yet to exceed $329 in its young secular bull. Yet even at $1051 gold, this industry was earning $185 per ouncewith its average all-in sustaining costs of $866! So those dire left-for-dead gold-stock price levels were truly fundamentally-absurd, as I argued aggressively in July, November, and January.
