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After three years of pain, can gold stocks break their losing streak and see a gain in 2014? History says the chances are good.
Here’s why that is the case.
So says Frank Holmes (usfunds.com) in edited excerpts from his original article* entitled Gold Stocks: What to Expect in the New Year.
[The following is presented by Lorimer Wilson, editor of www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Holmes goes on to say in further edited excerpts:
The most recent string of losses in the gold mining industry has been brutal, causing many investors to give up on the sector and sell their holdings. Since the beginning of 2011, the NYSE Arca Gold Miners, the FTSE Gold Mines, and the Philadelphia Gold & Silver indices all declined more than 60%. [That being said,] ditching this sector may not be the best action to take this year because miners are approaching the historical limits of multi-year declines.
Take a look below at the Philadelphia Gold & Silver Index (XAU) during prior periods of stress. While gold stocks have a history of higher volatility compared to the overall U.S. market, consecutive periods of declines are rare.
In 30 years, the XAU never had a losing streak of more than three years. In fact, there were only two previous times in these three decades in which the XAU saw a trio of losses. One was back in the early 1990s, when the index fell 19.09%, 16.75% and 11.75% in 1990, 1991 and 1992, respectively. What’s striking about this period is the incredible rebound that followed. The XAU rallied 85% in 1993. U.S. Global Investors’ Gold and Precious Metals Fund (USERX) climbed even more, increasing a whopping 124% in 1993.
Could we see a repeat performance? Perhaps. A key is watching government policies, as they can be a precursor to change.
Let’s take a look at the other period of weakness. This three-year loss occurred in the late ‘90s, with a muted rebound in 1999. However, at that time, the Bank of England (BOE) was auctioning off a significant amount of its gold reserves when bullion prices were at their lowest in 20 years. From 1999 to 2002, the central bank in England sold off 400 tonnes at a value of about $3.5 billion. If the BOE had held onto this gold, it’d be worth nearly $15.9 billion today.
Following the period when the BOE sold its gold, the XAU rebounded. While the index gained only about 6% in 2001, gold stocks rose 41% in 2002 and about 42% in 2003. During this period, gold and gold stocks were again influenced by a change in government policy. In this case, the liberalization of gold purchases was occurring in China, which was positive for gold.
What about 2014?
What catalysts could turn gold stocks around and end the losing streak? Investors have multiple possible events to choose from that could cause gold and gold companies to rally. In a recent Mineweb article, Lawrie Williams listed several:
- Gold ETF sales have slowed…
- The COMEX warehouse is running out of available physical gold,” which is causing more traders to demand delivery of additional gold.
- China may continue to build its gold reserves…
- India could ease its gold import restrictions…
- Unrest in the Middle East likely could persist.
- There may be a “major hiccup” in U.S. growth…
- Newly mined gold supply may be underwhelming.
Williams mentions a few downsides as well, which would result in an unprecedented fourth year of declines for gold stocks:
- the Federal Reserve could cut back on bond purchases which could come “without adverse general stock market reaction” and,
- there may continue to be improvements in the unemployment situation in the U.S. and Europe.
Ralph Aldis, portfolio manager of U.S. Global’s gold funds, the Gold and Precious Metals Fund (USERX) and the World Precious Minerals Fund (UNWPX), believes the best time to buy gold is when the market hates it…saying “I think pessimism has reached a maximum, particularly in the gold space. Historically, when pessimistic consensus is this strong and gold stocks are hated this much, these are turning points. The opportunity is here; don’t get discouraged.”
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://www.usfunds.com/investor-library/frank-talk/gold-stocks-what-to-expect-in-the-new-year/#.UsymW2GA1jo (©2014 U.S. Global Investors, Inc. All Rights Reserved.)
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