Hi Guys, I am looking at various scenarios and relentlessly...

Hi Guys,

I am looking at various scenarios and relentlessly testing my strategy which is premised:

"that now is a cyclically opportune time to buy selective gold miners due to a sentiment and capital flow driven mis-pricing of companies relative to their potential outlook."

I have selected companies based on a strict criteria which includes their domiciled operations. Australia (and Brazil) are the two domiciles I like due to their commodity currencies.

I am reading a lot of US centric analysis where some commentators, even the previous gold bulls, are anticipating a further decline in USD POG before another bull market develops. But what does this mean for Australian (and Brazilian) gold miners?

Firstly, here's a sensitivity analysis for USD POG vs. the AUD. The white boxes show where the status quo of c. $1,457 AUD oz is achieved (the yellow box with a border is where it sits currently - AUD 82c & USD POG $1,195):



As you can see, if the AUD falls 1c the USD POG can fall by $10-15 and Australian miners will receive the same, AUD revenue per oz produced.

Next, if we look back to the depths of the GFC we can see that USD POG fell to c. $748 on 10 November 2008:



Over the same period the AUD had also fallen precipitously:



This provides a degree of protection for Australian miners given that the AUD and US POG history in the GFC.

In addition, given that the Australian economy relies so heavily on iron ore, coal, oil and gas export revenues it is quite possible that as economic growth slows, the RBA cuts interest rates and Australia possibly enters it's first recession in multiple decades that the AUD will return to a trading range shown in the red rectangle above. Glenn Steven's is certainly talking of a 75c AUD target.

To me, this reinforces the premise that even in a downside scenario as extreme as the GFC selective Australian gold miners are currently mis-priced too heavily to the downside. Of course the emphasis is on "selective". There are still many crap explorers, developers and producers that will not survive further downside price moves. If you pick correctly and have patience there may be some great returns ahead.

Cheers
John