Gold Hills Mining Ltd. (fka GHML)

[SuperMike]

Gold enters the WWF

The last few days have seen a tremendous decline in the value of gold as measured in dollars. Pundits and prognosticators far and wide are offering opinions on gold and its “value.” As an owner of gold and an individual in search of real value I would like to offer my views on the recent “gold smash” and as always try and put these events in perspective.

In the last two and a half weeks the dollar price of gold has fallen from roughly $1598 to $1325 and is now hovering around $1380. This type of move which was steep and compressed has not occurred in years. Numerous reasons for the “smash” have been offered, including gold price manipulation by large market participants to investors believing that gold has no value and every other theory in between. My question is what does it matter? It is what it is. The price is the price at this moment. The issue is, does the current price accurately reflect the VALUE of gold or not? This is the crux of the valuation of any asset: is it fairly valued, overvalued or undervalued? I believe that gold is currently undervalued and it is undervalued even more today than two weeks ago. If you agree that gold is undervalued then this would be an excellent buying opportunity; a greater opportunity to realize true value than two short weeks ago.

Let’s briefly consider gold as if it was strictly a “commodity.” Based on the cost of production for last year, it cost the top producers between $1000 and $1100 per ounce to mine. In a Forbes survey of 60 mining companies the average cost to produce an ounce of gold was $1391 per ounce. Given that production costs continue to rise, if the price of gold remains below $1400 there will be little incentive to produce gold and the supply will diminish accordingly. Although this price may not represent a bottom, it will clearly affect the supply/demand equilibrium.

Let me quickly examine some other fundamentals of the gold market as they stand today.
1. In 2012, China imported 835 tonnes of gold and retained 360 tonnes which were produced domestically. India imported 864 tonnes. Combined, these two countries consume over 75% of global gold production. We can conclude therefore that global demand for gold remains strong.
2. Monetary expansion in the U.S., Japan, and U.K. continues and now includes Australia.
3. European debt stress and political discord continues.
4. Domestic real interest rates are negative.
5. Recommendations released by Soc Gen, Goldman, Citi, Deutsche Bank and many other prominent market players indicate extreme negative sentiment towards gold.

As I see it, this has truly been a remarkable few days in the gold market. The recent market action can be disconcerting as the fundamentals that persuaded us to own gold initially are questioned. It is not totally unprecedented however as we had a 35% decline in gold as recently as 2008 before continuing the rise which began in 2001. The bottom line seems to be that this is a market correction offering a genuine buying opportunity that may soon pass once the fundamentals reassert themselves.

Enjoy a great week,

David Yoe

http://www.strategicgold.com/insight/gold-enters-the-wwf/