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Feb 7/08 -The Disconnect Between the Gold Price and Gold Shares
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The big mystery around Gold stocks right now
is;
why are the Gold stocks generally lagging the price of
physical Gold bullion?.
There's several reasons why the Gold stocks are generally
lagging the
price of Gold bullion, however, IMO, the biggest reason why Gold
stocks have lagged the price of Gold is; the excessive
stock
dilution that has recently occurred throughout most of the Gold stock sector.
The disconnect between Gold stocks and the price of Gold really
seems to have started gradually shortly after the strong rise
and subsequent sharp drop in the price of Gold during the
spring/summer of 2006... following that period, there seems to
be a marked increase in the amount
stock dilution taking
place throughout the Junior/Exploration Gold stock sector.
Many Gold stock Analysts and Promoters make their living
getting paid in stock, so don't expect them to tell you about
the rampant
stock dilution trend that's really accelerated
throughout the sector over the past year, as doing so would generally
be against their own financial interests.
The information, reasons, and implications around the excessive
stock dilution in the Gold stock sector are varied and complex,
but essentially the number of shares in many Gold stocks (over
the past 1 - 2 years in particular) have increased at such an
excessive rate, that essentially the market for Gold stocks has
been
flooded; the rampant increase in the supply/number of Gold stock
certificates has
overwhelmed the limited demand for the shares from investors.
While it's true that Gold companies (and public companies in
general) often raise capital via methods that often result in
stock
dilution, IMO,
the amount of stock dilution across the Junior/Exploration
Gold sector over the past 1 - 2 years has simply become so
excessive, that it has resulted in a drag or disconnect between the price of Gold bullion and the sector
itself.
The excessive
stock dilution within the Gold sector stems from
several factors, ranging from;
The actual need for capital for legitimate companies,
The printing & cashing in of shares for cash from scam companies,
Companies deciding to raise capital (while the price of Gold
is high) simply for the sake of adding to cash reserves while the
sector is still hot.
Financiers are funding these companies and receiving
discounted shares... many of these Financiers are electing to sell their shares
shortly after receiving them, thus quickly
diluting the shares... and because they've obtained
their shares at a discount, they can often sell them under the
retail price and still make a profit, which can turn the retail
shareholders into bagholders, which can reduce the risk appetite
and market depth for future retail shareholders in the sector. Difficult operating
conditions stemming from currency fluctuations, escalating
operating costs, credit
crunches, labor
shortages, geo-political problems, etc, etc... are forcing
many companies to obtain multiple unanticipated financings,
resulting in higher than forecasted stock dilution.
With several hundred-plus Junior/Exploration Gold
companies busy
raising capital by issuing shares, IMO, there's just simply too many
of these companies issuing shares, which has effectively flooded
the Gold stock market. The senior Gold stocks have faired much
better than the Junior/Exploration companies for a couple
reasons; (1) the Senior Co's have better cash flow, and
therefore are better able to finance their businesses without
having to resort to "excessive"
stock dilution, (2)
there's only
a handful of senior Gold companies when compared to the hundreds
of Junior/Exploration Gold companies... it's the old "supply
and demand" rule in effect.
When you compare the "supply fundamentals" between Gold bullion
and Gold stocks, it's not hard to see why Gold bullion has been
outperforming Gold stocks against a backdrop of increasing
demand for Gold bullion;
The supply of new Gold bullion from mines has been stagnant
at
approx. 2,400 tons per year for a couple years now (and is unlikely to increase
meaningfully anytime
soon)... compared to
the supply of Junior/Exploration Gold stock certificates which are generally being
increased
anywhere between 10% to 100% per year, per company (depending on the company).
While many stock Analysts and Promoters are saying the Junior/Exploration Gold
companies are suffering from currency fluctuations,
escalating operating costs, credit
market problems, geo-political instability, labor shortages,
etc, etc, (and they're right, many of the companies are
suffering from these problems)... however, what the stock Analysts
and Promoters are failing to recognize or disclose
is; regardless of the source of the problem, many of these companies are
typically going back to the same solution to solve their
problems, which is; issuing more stock to raise more capital, aka:
share dilution.
You
can check the historical number of shares outstanding in your
company(s) by checking with either the
SEC (for US listed
companies) or
SEDAR (for Canadian companies) to see how much your
investment has been diluted over the past 1 - 2 years... if you
do the research, you'll see many of the Junior/Exploration Gold
companies have been diluted excessively over a relatively short
period of time.
In
hindsight, simply buying physical Gold bullion (where the
overall supply is very difficult to dilute because of its very
tight supply fundamentals) would have been a much safer and
better performing investment over the past 1 - 1.5 years compared to
owning almost any of the vast majority of Junior/Exploration
Gold share certificates, especially the ones which have been
excessively diluted.
From the publisher of Webpennys.com
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