A new Nevada gold rush is under way
The state has the second-largest reserves in the world, and investor demand for precious metals looks likely to grow.
High input costs -- from energy and labor to regulatory compliance and safety -- and lower-than-expected prices have taken a big toll. When gold and silver prices were rising seemingly without end, it was easy to sell investors on the dream of huge returns. But with prices stuck in a brutal, if volatile band and threatening to move downwards, the need to replace reserves with high quality assets is more pressing than ever.
Nevada has long been one of the great fonts of gold production and the latest trend in exploration in the north of the state is focused on deep deposits. Barrick's open-pit Cortez mine has morphed into a second deep mine called Cortez Hills that is exploiting very high grade deposits. Whereas open-pit, shallow gold grades run from 0.05 to 0.2 ounces per ton, these deep grades can carry up to 10 times as much.
While the current price action in gold and silver is tenuous, the long-term fundamentals are extremely bullish. The global economy is still very fragile and despite all-time nominal highs in U.S. equities the S&P 500 (SPY) is very expensive from an earnings perspective. The Schiller price-to-earnings (P/E) ratio currently stands above 23 and with lackluster GDP growth and employment data looking soft there is a lot of risk with stocks at these prices. If the market rolls over investors will look for other asset classes.
The price of gold is now closer to the cost of production than it has been since the early days of the bull market and only those companies that can lay claim to the best deposits will attract the next round of investor interest.
Because of this there is a tremendous amount of exploration activity across northern Nevada. The best of the junior producers will be the initial winners. For that reason, I think a company like Allied Nevada (ANV) will do very well over the medium term. Production costs in 2012 were higher than forecast, but the company has two mines with high grades, its production targets are intact and it has enough cash flow at current prices to hold product back from the market in anticipation of higher prices later. Moreover, it has royalty properties leased out for exploration in the prolific Battle Mountain-Eureka trend.
Most exploration companies exist to be bought by one of the majors. A company like Valor Gold (VGLD) is interesting because it was created to focus on exploring deep, high-grade deposits for just this purpose. A spinoff of Pershing Gold (PGLC) -- which is focused on becoming a producer -- Valor has a handful of high-potential properties situated between a number of operational mines on the intersection of three of the highest production trends in the area.
Nevada now has the second-largest gold reserves in the world, behind the Witwatersrand basin in South Africa. This region is only just beginning to reveal its value. I expect demand for gold to rise as both a monetary reserve and a form of savings. We have not put behind us the problems that were revealed during the 2008 financial crisis and while gold may be caught in the crosswinds between inflation and deflation, the trend higher will reassert itself as central banks position themselves for the next phase of this cycle.
There's gold in them thar hills!
I spent a lot of gold in them thar hills outside Carson City once!
Since antiquity all societies have considered gold to be the one commodity that has served as a measure of wealth and as a hedge against fear and uncertainty. Given the rapidly changing landscape of stocks, bonds, real estate and other commodities gold seems like a reasonably safe area to have at least some assets for the long term.
Peace to all ~
QUOTE: "While the current price action in gold and silver is tenuous, the long-term fundamentals are extremely bullish. "
Forgive me, but just what the Hell does that mean?
Are the land where these company are mining the gold from owned by the federal government? If so we are basically giving away the valuable resources away for free to these companies. Then our federal government doesn't tax the same company that is making a killing on the gold mineral? What is wrong with this picture?
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