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July 26, 2010 Dear Friend,
We raised our price
target to $36 from $29 for MeadWestvaco and raised
earnings estimates owing to higher foreign sales.
We incorporated a 2% terminal growth rate, benefiting
our DCF valuation.
We are alarmed at
19.6 tonnes or 660,000 oz of gold bullion ETF sales in
the first 18 trading sessions of July coinciding with an
$86.00 gold price decline. Each 10,000 oz of
gold sold created a $1.36 per oz gold price decline.
Said slightly differently, gold prices fell 4.656 times
as much as bullion ETF holdings fell 1.48% while gold
prices fell 6.91%. It seems like there are no
buyers. Worse yet, bullion ETFs hold about 2,000
and weak central banks 7,500 tonnes of gold. Any
large holder could easily seek to exit after witnessing
a large price collapse with a pitiful 19.6 tonnes of ETF
sales. We have long been uncomfortable with large
physical metals or metal ETF accumulations among
investors, who have no place as hoarders and do not
understand the markets may collapse if they sell.
We downgraded
Goldcorp to Underweight from Overweight owing to its
premium valuation. We downgraded Newmont to
Underweight from Neutral as it has the least growth, or
the greatest gold price dependence.
We stopped short of
advising "sell everything" for four reasons that suggest
a bottoming zone not too far below our $1,050 long-term
gold price target. First, voluntary investor
selling might abate < $1,000 gold. Second, China
may become a large buyer in a market selloff, much like
it did for base metals in 2009. Third, a return to
1997 jewelry demand levels might absorb half of gold
bullion ETF sales in one year. Fourth, new mining
investment and some mines' operations might dry up near
$800 to $900 gold.
For those reasons we
do not expect gold prices to return to the $375 level
seen in autumn 2003 as the bullion ETF first was
promoted.
Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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