Mark Bristow remembers a time not so long ago when gold "was not even considered a commodity that one should invest in.
That was in 1995, when his gold mining company Randgold Resources (GOLD) was just getting off the ground in West Africa.
By 1999, CEO Bristow recalls, gold had sunk to near $250 an ounce. "People were questioning whether it was a precious metal and hard asset.
It was a time in which investors had dot-coms, not gold on their minds. But the dot-com bubble burst. Gold prices turned higher, rising to an eventual peak a year ago that was 650% above their 1999 lows.
Gold has since corrected and trades around the $1,700 mark. But, analysts say, despite the consolidation, a more than decade-long advance may yet have room to run.
The yellow metal faces geopolitical uncertainties. But low interest rates and fear of inflation, due in part to quantitative easing, give gold a chance to show its strength as a shape-shifting asset.
"Gold plays different roles at different times," said futures analyst Ira Epstein of the Linn Group.
Like the dollar, gold often acts as a safe haven, moving counterpoint to rising and falling stocks. But, rather than a safe haven, it's trading as a risk asset now — parallel to the stock market, analysts say.
"More than likely, gold is going to be tied to equities and will move in the same direction for the time being," said Travis Rodock, senior market specialist with Efutures.com.
Silver traded to a high of $37.48 an ounce in February, well below last year's peak near $50. It's outpaced gold percentagewise, but has lately lost a bit of its shine, last trading around $32.
"Silver is a poor man's gold and at the same time, it's an industrial metal," Epstein said.
The white metal responds well to words like "stimulus program," especially when "infrastructure" is added, he says.
Mining MoneyGold and silver prices are obviously a key factor in miners' profitability. The more prices rise, the more miners can leverage their fixed costs, especially as production cranks up.
"If you can extract it cost effectively, it could be a lucrative business," said Deutsche Bank analyst Jorge Beristain. "You're essentially mining money.
But the stocks, like the commodities they are linked to, are volatile ones. IBD's Mining-Gold, Silver & Gems group ranked No. 2 of 197 industry groups last week. When prices corrected over the summer, the group was near the bottom of the barrel.
As for gold miners, said HSBC Securities analyst Patrick Chidley, "I think the stocks are very cheap and trading on multiples we haven't seen in decades.
Not For SissiesRandgold's Bristow says mining isn't profitable "unless you manage it as a business, not just a gold mine.
Randgold's team settled on Mali in French West Africa to set up operations. It was off the beaten mining path, but one in a dozen regions worldwide where deposits were thought to top 3 million ounces.
A native of South Africa, Bristow learned French. His team built ties with locals as they opened mines.
"Today we represent 9% of the GDP of Mali," he said. "We're the biggest taxpayer and one of the largest employers outside government.
While gold might be a safe haven at times, Mali is anything but that these days. Islamist extremists have taken control of a large region in the north of the country. The situation presents "a real challenge to Mali," Bristow says, but adds his mines are in areas "a long way from the conflict.
Randgold has managed through floods, a coup in Mali and a civil war on the Ivory Coast.
"Certainly mining is not for sissies," Bristow said.
All of this figures into mining costs, on top of costs like fuel, labor, equipment and corporate overhead. Many of those costs are rising.
Miners often mark their break-even costs at $500 to $700 an ounce. But Beristain says "they're only talking about mine-level costs.
But those break-even costs typically don't include things like corporate and administrative expenses, taxes, interest on debt and maintenance "to just keep the lights on," he said.
"We think the true cost of gold mining is about $1,300 an ounce," Beristain said.
In Latin America and Africa, he adds, it is standard practice for big mining firms to build roads, power infrastructure, schools, hospitals and housing.
"When you start adding all those extra things on, it diminishes returns to stockholders," Beristain said.
Midsummer MisunderstandingGold mining stocks have tended to lag the performance of the gold price, prompting some larger mining companies to look at more shareholder-friendly ways of allocating their cash, Beristain says. Instead of reinvesting back into operations, some are boosting dividends and buying back stock.
Newmont Mining (NEM) tied its dividend to the rising price of gold. Hecla put in place a similar dividend policy, linking it to the silver price.
One reason costs have gone up for some miners is that they've been mining hard-to-get, lower-grade ore while prices are high "to maximize the value of their long-term ore deposits," says Chidley.
"If you don't mine low-grade deposits when prices are higher, you'll likely never mine it," he said.
Randgold plans to stick to higher, easier-to-mine grades, hoping to bring costs down from around $700 an ounce to as low as $500 over the next five years.
It aims to produce 1.2 million ounces by 2015, about 40% above this year's estimated production.
"If gold went below $1,000 we would re-look at our plans," Bristow said.
Gold retreated 19% in the nine months through May, but held above $1,500 an ounce. Prices lagged through July, then started to climb.
HSBC's Chidley calls the correction a "midsummer misunderstanding." The reason: misguided beliefs that the global economy might be on the mend and wouldn't need more quantitative easing.
"Gold is an insurance policy, basically," he said. "The market lost its conviction that gold was necessary as a portion of your portfolio.
But the U.S. economy did need a boost after all, and the Fed relented with more quantitative easing. That gave gold a boost, Chidley says, because every time more money is printed, the likelihood of future inflation increases.
"It's like filling up a dam," he explained. "At the moment the dam is holding back the water. But at some time the dam could burst. Think of inflation as the level of the water downstream from the dam. The threat of inflation increases every time you top up the money supply using QE.
$2,100 Price TargetGold prices have recently been more clearly aligned with stocks than with currency moves. Still, central banks in other developed nations are either engaged in or looking at monetary stimulus, which could boost inflation risk.
Greece is already on the eurozone dole. Spain is filling out the forms. Japan is trying to stimulate its economy by lowering interest rates.
Gold demand is also getting a boost from central banks in Asia, says Chidley, many of which are raising their gold holdings. Consumers in Asia and other emerging economies, meanwhile, are buying more gold for investment purposes.
"We look for gold to move up above $1,900 in this quarter and average $1,850 next year," Chidley of HSBC said.
Beristain says Deutsche Bank expects gold to hit $2,100 next year. The rise will be fueled by additional central bank action and supply constraints in South Africa on the heels of miner strikes.
Silver will "piggyback on gold's strength," Deutsche Bank said.
It recommends mining stocks Barrick Gold for its attractive valuation and dividend policy, and market laggard Kinross Gold (KGC) for a potential turnaround.
Also on Deutsche Bank's recommended list are silver mining stocks Coeur D' Alene and Pan American Silver (PAAS), both seen benefiting from rising silver prices and stabilizing costs.
Rodock of Efutures.com sees gold trading sideways until inflation becomes more of an issue.
"Once we start to see inflation as a result of monetary stimulus pushed into the marketplace, gold will definitely be an attractive asset to own. Eventually, we'll see prices higher than at levels right now," he said.
Epstein thinks that gold needs a substantial boost of its own before prices move markedly higher. That might mean a currency shock, he says, or a clear turnaround of world economies.
"It doesn't have either of those going for it right now," he said.
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