Why are gold mines so cheap?

In the Barrons' Abelson thinks gold mines will do what their name suggest (Up and Down Wall Street Saturday, April, 2012 A Golden Opportunity). He not the only one. A lot of well known investors/ hedge funds think gold mines are cheap. They have burned severely their fingers in the last months. Gold mines are already for quite some time ridiculously cheap and they are not following the gold prices up very well. The market prefers the real thing: gold in their hands, even the gold ETF’s are mistrusted because maybe they cannot deliver the physical thing and maybe some other things could go wrong. And that is what you don’t want when you buy gold, all those fears.

For commodity prices it has been quite normal that the commodity producers couldn’t follow the commodity prices. But for gold mines te difference starts to become too big and it seems to get only worse. Many gold bulls are now so disappointed that they to their horror are selling. The sentiment is for the fourth time in a year bearish and so the bulls hope on a contrary movement. Gold mines have too much cash and they are slowly buying each other. Even that has not helped te prices.
The reasons for the bad performance are the preference for physical gold and the higher volatility of the prices of gold mines and the unreliable following of the gold prices.
In the articles quoted below these things are discussed well. Especially the argument that the relative volatility is now not a problem could be the right reason to become bullish. After so much underperformance you can argue it has to turn but markets can remain longer cruel than your patience.

source: Where’s the Beef for Gold Equities? By Frank Holmes
http://advisorperspectives.com/commentaries/global_041312.php

Will oil become even more expensive versus gold or will China prevent this

The chart shows the rise of the oil price (Brent) versus gold in periods of six months. When you see the fluctuations nobody will be surprised when the oil price rises another 10% versus gold. When the oil price starts to rise versus gold you normally see quite a big run.

But lots of people think the commodity world turns around China and especially from the Money growth of China. That should mean that the oil price has now risen enough, given the poor growth prospects of China while Europe is in a recession and the US drinks less of gasoline. So the oil price should fall.

The price momentum shows the market is thinking now that the situation in Iran is no longer controllable or because what Iran is doing or because of what Israel will do.

Gold price growing with balance sheet of FED and ECB

The chart of Strategas shows that there is a reasonable correlation between the endless expanding of the balance sheets of the central banks and the gold price. Overliquidity ought to lead to higher gold prices. The connection between currency reserves in the world and the gold price is even stronger and longer (before 2006 the gold price didn’t move in tandem with the balance sheets of central banks).

Gold Overbought?

On the dutch site IEX Cees Smit had a worrying chart about the gold price: according to his twindicator the gold price has gone down too much below the twindicator support level.
There is so much uncertainty in the world and central banks are printing money in astronimical amounts and still the gold price seems vulnerable.
Several other commodity price charts suddenly have bad charts. They are probably overbought. There was too much speculation on hogher prices because of QE27 of the Fed, signs that economic growth in the world is accelerating and weakness of the dollar.
Because of all the Irish doom and the coming attacks on Spain the euro will be weak and the dollar will be strong as safe haven. That strength of the dollar should be negatie for the gold price and other commodity prices.
All the disasters of today didn't cause a spike in the gold price. That indicates gold and silver are overbought.
BCA is careful with gold, because the gold silver rate has fallen below 50 and now gold and silver are too expensive because of that.
Negative for gold is also that economists are writing less panicky about QE2, it will be not that inflationary (more stories to follow).

Still it is difficult to remain negative about the gold price for a longer period when real short interest rates are so much lower than 2% for an extended period as the Fed promises. The uncertainty about Spain is favourable for the gold price and the growing preference of many Emerging Markets for a bigger part gold in their currency reserves will help. But watching what the gold prices does now could be prudent.

Gold, silver or Dow Jones?

The chart of intelligent bear (http://home.earthlink.net/~intelligentbear/com-dow-au.htm) shows the Dow Jones divided by the gold price over a long period with its trend. In the long run the Dow Jones goes up more than the gold price and you also gets dividends. So on the very long run you can better invest in the Dow Jones than in gold. But you have decades that gold is better. Since 2000 the Dow Jones is in a free fall versus the gold price. That fll can maybe stop at a level of 5 (so at a Dow Jones of 12,000 that could be a gold price of 2,400).
When the inflationary forces become as big as around 1980 the gold price can even go higher. For the time being that is very unlikely because of the high unemployment rate, the high productivity growth and the emphasis on cost reductions.
Bernanke has to introduce a QE3 to get gold prices above $2000 per ounce, I think.

Because of the start of phase two of monetary easing, QE2, there is tremendous attention for commodity prices, especially gold and silver.
The gold price should have left phase two of the Minsky cycle, after which he explosive rise should occur. That could happen now when you compare it with other big bubbels (see chart). According to these theories the gold price can rise tremendously, but fundamentally we are already too high and when the Minsky moment will occur then the gold price will fall below current levels. Investing in gold is very risky and only a good advice when Bernanke goes on and on with quantitative easing and doesn't hike rates (as will happen when the unemployment rate declines enough).

The silver price is rising faster than the gold price. Especially last week was a record week, individuals bought for 523 ton silver with ETF's. Silver has all kind of industrial uses and very popular for coins. When Bernanke manages to accelerate the growth in the world causing higher inflation normally the silver price will rise more than the gold price.

The Bank Credit Analyst thinks the gold price has risen too much and you should switch from copper to oil.
That is very well possible but the coming months silver could bubble the most. So take care, gold is a dangerous investment and silver is even much more dangerous (and so could be rewarding).