BAD STOCK, POOR MARKET CONDITIONS, BUT OTHERWISE A GREAT COMPANYNewmont Mining, “Newmont”, is one of the world’s largest gold mining company by Market Capitalization with operations in the United States, Australia, Peru, Ghana and Suriname. On average, over the past 7 years, the company has contributed to 3.58% of the world’s supply of gold (based on World Gold Council figures). Compared to its strongest competition, Barrick Gold, its operational mines are located in politically stable geographical zones. In an industry where government intervention and scrutinity is part and parcel of normal business, an investor would most certaintly benefit from companies that has less exposure to such erratic regulations. Newmont’s share price is highly correlated to gold price, which should be of no surprise as its bulk of profit is derived from gold mining.
Gold, for a good part of modern history, has served as a hedge against inflation and would probably continue to do so. It has also become an asset investors flock to in times of uncertainty. While it is great that we are getting news almost every day about indices making new highs, investors should not be complacent and assume this would continue forever.
Firstly, the Chinese financial industry is undergoing a deleveraging process. In an article by CNBC, according to the Institute of International Finance in June 2016, China’s debt-to-GDP ratio stands at 327 percent. If we recall, just about a decade ago, overleveraging was the cause of the great recession, causing the economy to plunge into freefall. Gold prices rallied from the low of US$781 per ounce at the start of the crisis in September 2007 to an all-time high of US$1878 in August 2011. To put it simply, no one had a clue about where we would move on from there, and their best bet in times of uncertainty would always trace back to Gold. As you are reading, China is still in the midst of their deleveraging process. Money supply growth has slowed tremendously while aggregate financing was RMB 70 billion lower than estimated, at RMB 1.04 trillion, according to a report by Bloomberg. With lesser money going around the economy, interest rates are set to rise. The Chinese 10-Year Bond Yield stands at 3.96% as of this writing, up from 2.66% about a year ago. As the interest rates rise, companies would find it increasingly difficult to meet their debt obligations as refinancing becomes more expensive while they are still drowned in excess capacity. Due to the significant amount of bureaucratic red tape around Chinese statistics, investors’ sentiment is should be best reflected in the market. The Shanghai Stock Exchange Composite Index (SHCOMP) is at 3,276, down about 5% from this year’s high of 3,447. While we have yet to see any event that could trigger a market-wide correction, it would not be right to assume a black swan event is not brewing somewhere.
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