1.25% Versus 0.25%

Today’s news emanated from Europe, as last night the Portuguese decided to throw in the towel and seek a bailout. That did not really have any ramifications for stock markets there, nor did the fact that the ECB actually raised rates 25 basis points. I had not believed Trichet would really go through with it, given the chaos with the banking system and sovereign debt in Europe, but he did what he said he would do, so now overnight rates there are five times higher than ours!

Thus far, one would have to say, between Trichet and Bernanke, there is absolutely no comparison, as the former does really seem to care about preserving some semblance of integrity for his currency. Having said that, the euro is still a cobbled-together mess, in spite of Trichet’s willingness to attempt to act like an adult.

As for the markets, they were a nonevent before the ECB news and were modestly higher after. U.S. stocks, too, were modestly higher before news of another Japanese tsunami broke, driving the market to a small loss. By early afternoon, though, the market was back to flattish, but the indices then “leaked” for more or less the rest of the session. All in all, ex the Japanese-inspired swoon, it was a dull day.

Away from stocks, the dollar was slightly stronger as the euro softened. Fixed income was a little lower and oil edged higher. The metals traded both green and red before closing flattish.

Dividend and Conquer

On a related note, today Newmont held its analyst day and made a couple of important announcements, one being that it expected production to grow from 5 million to 7 million ounces over the course of the next five years or so, and the other that it would boost its dividend 20 cents for every $100 increase in the price of gold. At today’s gold price that means it will pay a divided of about a dollar, which is a yield of approximately 1.7%, but for those folks who are willing to own the stock over time, a $2,000 gold price would create about a 3.5% running yield on a purchase you made today.

I think this is something of a game-changer for Newmont. The company has gotten no respect for anything it has done and the valuation has been reasonable, if not cheap. Now you have a gold stock that will have production growth, a bit of yield, and is still very reasonably priced. In my opinion, the market has been overpaying for growth because folks don’t believe the price of gold in the future will be higher. Thus, a company like Newmont, which has had no growth, has been penalized.

A New Day for Newmont

Somewhere down the road, the market will get it into its head that the gold price will not only be where it is today, but somewhat higher, and a company like Newmont could get a large rerating. However, now that it also has production growth, it should see a rerating as a consequence of that news.


About abwehra group

The Art&Science of Trading Gold
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s