Ralph Aldis: How the Five Principles of Capital Allocation Can Mean Gold Mining Success

The Gold Report: The price of gold is flirting with a five-year low. Do you attribute this solely to the strength of the U.S. dollar, or are there other factors at work?

Ralph Aldis: There are other factors. Most important is the strength of the equity markets. Looking at a six-year window, we have seen, for the third time in the last hundred years, the highest returns for such a period. This happened before in 1929 and 1999. These phenomenal returns have been fueled not by fundamentals but rather by the U.S. Federal Reserve, which is trying to jumpstart the economy.

All this has taken people’s eyes off gold, but it won’t go on forever.

TGR: The bear market in gold equities is now four years old. This means lower gold production and less exploration. Gold production from South Africa has collapsed. Shouldn’t lower gold production result in a higher gold price?

RA: Yes, but it’s not always linear. The amount of gold mined annually is relatively small compared to total gold supply. That is one of the reasons some people argue that the mines don’t matter that much. But I think on the margin they do.

“One company doing the right things is Klondex Mines Ltd.

South African gold production has fallen. And not that long ago, the central banks were selling 400–500 tons per year of gold to the market. Now, they’re buying 400–500 tons. China is the world’s largest gold producer, but it’s not exporting. We can see what’s happening and be invested for it, but we don’t know when lower supply will lead to higher prices.

TGR: How do you see the mining industry adjusting to lower gold prices?

RA: I look at the income statements from all the mining companies and calculate their break-even point. Right now, …read more

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