Fund manager and market statistician John Hussman sees bad things on the horizon. He’s been buying gold shares in Hussman Strategic Total Return Fund this year. At the start of the year, his three largest gold positions were Newmont Mining Corp (NYSE:NEM), Barrick Gold Corporation (USA) (NYSE:ABX), and Agnico Eagle Mines Ltd (USA) (NYSE:AEM).
Where we Stand
Every week Hussman writes a commentary about what he is seeing in the market. He is not a prognosticator, he is more of a statistician and historian. He looks at what has happened in the past and tries to see how today rhymes with that history using various math based-measures and techniques.
Here is what he sees: “Matching the valuations of the 2007 peak would require another 8% advance in the S&P 500. A return to historically normal valuations would imply a 48% market decline – the average cyclical bear market in a secular bear market period has typically represented a decline closer to 38%.” Getting to a “secular low,” meanwhile, would require a 75% drop.
Translation: the market could move a little higher or it could fall a lot lower.
While Hussman uses hedging in his funds to protect against such adverse outcomes, he has also been buying gold in his bond fund. Gold will likely be a refuge in any sell off and more so if we see uncontrolled inflation.
The Largest Holding
A continued drop in the price of gold is likely the biggest concern facing Newmont Mining Corp (NYSE:NEM) today. That said, older mines and rising production costs are longer-term negatives to keep in mind.
The longer a gold mine is worked, the less gold it produces. Worse, the ore quality tends to get worse and worse as time goes on, too. This pair of issues leads to lower production and increased costs at the same time.
Newmont Mining Corp (NYSE:NEM) has been investing in new projects to replace its reserves, but these mines have generally been more costly to operate than hoped, including a big project in Australia. Although the company’s domestic operations have been performing well, the cost and reserve issues mean that higher gold prices are the most likely near-term performance catalyst.
The company’s dividend is tied to gold. While the yield is around 4.5% today, the recent drop in gold prices could lead to a dividend cut. That said, if Hussman is correct about the size of an upcoming market drop, higher gold prices, and dividend increases, could be on the way.