For the past eighteen months, gold stocks have been pummeled…What’s going to move these darn stocks? Will their day ever come? Could our research – gulp – be wrong? Jokes have even started circulating…[such as] a) “What’s the difference between a seagull and a gold stock investor? The seagull can still make a deposit on a Mercedes!” b) “Gold equities may be bad, but I slept like a baby last night. I woke up every hour and cried!” Laugh or cry, however, underneath this heap of stock-certificate debris is the contrarian opportunity of a lifetime. That’s a strong statement, I know, but below I present numerous well-researched reasons why I’m convinced gold stocks are one spark away from igniting the portfolios of those with the cash to buy, courage to act, and patience to hold. Words: 2800
So says Jeff Clark (www.CaseyResearch.com) in edited excerpts from his original article*.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Clark goes on to say, in part:
Let’s review the core reasons why gold stocks are the place to invest right now, and why I’m convinced much higher prices will be had before this bull market is over…
#1: Gold stocks have leverage to gold bullion prices
In spite of what has occurred recently, history is on our side here, as the track record of precious metals equities demonstrates they can reward patient investors tremendously. They rose:
- 950% from January 2001 to January 2008.
- 700+% from 1970 to January 1980, including 289.5% in the last thirteen months of that period.
- 211% in less than 24 months in the mid 1990s.
- Even during the Great Depression, the two largest producers at the time – Homestake Mining and Dome Mines – rose 474% and 558% respectively.
It’s normal for gold stocks to demonstrate this kind of leverage to gold. It would completely contradict the historical pattern – and common sense – for gold stocks to remain where they are until this bull market ends (and sometimes, even when the price of gold bullion falls, gold stocks can still offer big upside. Case in point: in the 24 months from January 1, 1981 to January 1, 1983, while the price of gold bullion fell by 25% – from $597 to $446 – gold stocks rose 72%. A series of giant gold discoveries in Canada set off a mini-mania in the equities.)
Check out the historical record, which includes some mind-boggling performances by juniors. [Source]
The granddaddy of gold bull markets occurred during the 1970s decade, one culminating in an unabashed mania in 1979 and 1980. Gold peaked at $850 an ounce on January 21, 1980, rising 276% from the beginning of 1979. Yes, the price of gold on the last trading day of 1978 was a mere $226 an ounce.
Here’s a sampling of gold producers from this era. What you’ll notice in addition to the mouthwatering returns is that gold stocks peaked not until nine months after gold.
You’ll see there was great variability among the returns of these companies. That’s why, even if you believe we’re destined for an “all-boats-rise” scenario, you still want to own the better companies….
Keep in mind, though, that our data measure the exact top of each company’s price. Most investors, of course, don’t sell at the very peak. If we were to able to grab, say, the middle 80% of the climb, that’s a return of 231.6%.
Returns of Producers in 1979-1980 Mania
|Campbell Lake Mines|
|Giant Yellowknife Mines|
Here’s a sampling of how junior gold stocks performed in the same period, along with the month each peaked.
Returns of Juniors in 1979-1980 Mania
|Mosquito Creek Gold|
|Eagle River Mines|
|Meston Lake Resources|
If you bought a reasonably diversified portfolio of top-performing gold juniors prior to 1979, your initial investment could’ve grown 23 times in just two years. If you managed to grab 80% of that move, your account balance still would’ve grown over 1,850%.
This means a junior priced at $0.50 today that goes on to become a Mania Phase winner could sell for $12 at the top, or $9.75 at 1,800%. If you own ten juniors, imagine just one of them matching Copper Lake’s return.
Here’s what returns of this magnitude could mean to you. Let’s say you have $10,000 to devote to a portfolio of the best of the best gold juniors. If our mania someday matches the classic 1980 blow-off top, your portfolio could be worth $241,370 at its peak… or about $195,000 if you manage to grab the middle 80%.
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This all assumes, of course, that you sell to realize the profit. If you don’t take the money and run at some point, you may end up with little more than tears to fill an empty beer mug. Consider this: many junior gold stocks, including some in the above list, dried up and blew away after October 1980. Investors who held to the bitter end not only saw all their gains evaporate but lost their entire investments, as well. Keep that in mind, because all bull markets eventually come to an end – even golden ones.
#2: Gold stocks are grossly undervalued
Gold stocks aren’t just inexpensive, they’re stupid cheap. Their current undervaluation is more than just compelling – it’s fire-sale attractive. It should have your full attention. Just look at the data and you’ll see what I mean:
- Relative to gold, the equities have not been this cheap since the waterfall selloff in 2008. The HUI/gold ratio is roughly 0.27, close to its bottom of 0.24 in October 2008. It hovered between 0.50 and 0.60 for most of a five-year period from 2003 to 2007, and exceeded 0.60 several times.
- On average, and in spite of weak gold prices at present, industrywide margins are roughly $1,000 per ounce. The price of gold wasn’t even $1,000 30 months ago.
- As a group, gold stocks are selling for less than their net asset value… by 20%. They traded 60% above their NAV in 2007, a common level for precious metals equities.
- Average P/E ratios of the 10 largest gold producers are less than half what they were just two years ago.
- For a $1,000 investment right now, you can get about 0.6 ounces of gold. For the same $1,000, however, you’d get four ounces of gold by buying shares of Goldcorp or more than five ounces by buying Eldorado Gold.
This undervaluation cannot and will not last. Even the trader who knows nothing about Newmont or Barrick or Goldcorp will sooner or later want to jump on this – and if he doesn’t, his boss will want to know why.
Some enlightening articles that agree with the above contention are:
- Precious Metals: Don’t Want To Play Anymore?
- Sprott: Current HUI Level Spells O-P-P-O-R-T-U-N-I-T-Y
- John Embry: PM Stocks One of the Greatest Buying Opportunities of ALL Time!
- Get Positioned: “Gold Rush” Will Cause Gold Stocks to SOAR – Here’s Why
- James Turk: Gold Stocks Are Making History – Here’s Why
- Is it Time to Load Up on Gold Stocks?
- Now’s the Time to Take Advantage of Current Discount on Mining Shares – Here’s Why
- John Embry: ‘Plunge Protection Team’ Hard at Work While Investors Puke Up Mining Stocks!
#3: Gold stocks are universally under-owned
There are plenty of reports about how little gold and silver the average mainstream investor owns – which likely means they own even less of gold equities – but the disconnect is bigger than you realize.
In the institutional world, pension funds sit at the head of the table. However, the typical fund devotes only 3% to commodities, and of that 3%, only 5% is committed to gold and gold stocks. In other words, only 0.15% of assets are in gold and another 0.15% in gold mining stocks, a pathetic total of less than one-third of one percent [see related article here]. Ditto other institutional investors.
Given the gamut of sovereign risks in virtually the entire world, even the developed world, the lack of gold and gold stock ownership is appalling. That will change as the growing fiat currency risks around the world impact investors more deeply.
#4: All that cash has gotta go somewhere
It’s one thing to say gold stocks are under-owned, but is the money available to buy them? One could make an argument that any rush into gold equities would be muted if no one has any savings or if demographics dictate that a fifth of the developed world will soon be retired.
At the end of Q1, S&P 500 corporations had $1.7 trillion in cash and another $4 trillion in short-term investments. The M1 money supply is currently $2.2 trillion. Pension assets exceed $31 trillion, more than twice the size of last year’s GDP in the U.S.. Contrast those figures with the $800 billion market cap of all primary gold producers trading in North America or the measly $32 billion market cap of all primary silver producers [see related article here].
- If corporations moved 5% of their “short-term investments” into gold stocks, the market cap of the industry would increase by 20%.
- If they chose silver stocks, it would grow by a factor of six.
- 5% of M1 would increase the market cap of gold producers by 14%; it would be 3.4 times bigger than the entire current value of all primary silver producers.
- If pension funds doubled their allocation to gold stocks (making it a puny 0.6% of total assets), it would amount to $93 billion in new purchases. If they went to 5%, $1.5 trillion would flood the industry. [Read this article on the subject.]
Also, don’t forget other corporations in the U.S. and around the world, insurance companies, hedge funds, sovereign wealth funds, mutual funds, private equity funds, private wealth funds, ETFs, and millions of global retail investors. There is, quite literally, tons of cash available for investment in whatever sector the mainstream targets.
#5: Physical gold may become hard to get
What if they all enter the gold market at or near the same time? The gap between supply and demand isn’t letting up. Since 2001, worldwide production is flat despite a sixfold increase in the gold price – and demand has grown from $3 billion to $80 billion.
I’m in touch with bullion dealers on a regular basis, and they’re all saying the same things. Andy Schectman of Miles Franklin insisted that the bullion market “will ultimately be defined by complete lack of available supply.” Border Gold’s Michael Levy cautioned, “If an overwhelming loss of confidence in the U.S. unfolds, the demand for physical gold and silver will far outweigh all known inventories.” Mike Maloney of GoldSilver.com warned that if shortages develop, “physical bullion coins and bars might become unobtainable regardless of price.”
As increasing numbers of people view gold as a must-own asset, and as supply is not keeping up with demand, where is the next logical place for investors to turn to get exposure? Mining equities would be the fastest way to meet that demand. It wll be the next logical step to take – maybe the only sensible step – if the supply of physical metal remains constrained. It will feel like the most natural thing in the world for them to do. It is indeed the overlooked reason gold stocks will soar [see related article here].
#6: Gold has a lot further to climb
I am convinced gold stocks will soar again because I am confident we will see a rising gold price. Many investors have focused on gold’s lackluster movement for the past eight months, forgetting that it rose a total of 2,333% in the 1970s – with much less currency dilution than we have today. For gold to match the same percentage rise from its 2001 low, the price would hit $6,227 per ounce! Nothing says it has to match that price – but neither does it have to stop there. Given the ongoing caustic actions of politicians, we see much more upside risk in gold than downside. [Here are links to several article agreeing with that contention:
- Update: 51 Analysts Now Maintain that Gold is Going to $5,500 – $6,500/ozt. in 2015!
- Goldrunner: Fractal Gold Analysis Says Gold On Way to $3,500 Mid-year!
- Alf Field: Correction in Gold is OVER and on Way to $4,500+!
- Leeb: Gold Going to $3,000 Before the End of 2012!
- David Nichols: Expect to See $2,750 – $3,000 Gold By June 2013 – Here’s Why
- The Time to Buy Gold Is When There Is Blood In the Streets and That Time Is NOW!
- The Future Price of Gold and the 2% Factor
- Richard Russell: NOW is the Time to Begin Amassing Your Future Fortune – Here’s Why and How
- Nick Barisheff: $10,000 Gold is Coming! Here’s Why
- Gold Will Reach $3,000/$4,000/$5,000 Before This Bull Market Is Over! Here are 12 Factors Why
- Contracting Fibonacci Spiral Puts Gold Near $4,000 by 2013 and $7-10,000 by 2020
- New Analysis Suggests a Parabolic Rise in Price of Gold to $4,380/ozt.
- Gold/Silver & Mining Stocks Going From Their Cycle Bottoms to Parabolic Peaks by 2015]
Here’s the key for gold stocks: once the gold price resumes its uptrend and begins making new records again, all sorts of investors – from large market-moving institutions to small retail buyers – will return to gold equities. I suggest beating them to it.
#7: “The boat” has a leak
The dilution of our currency is on a nonstop – and scary – trajectory. Just since January 1, 2000, U.S. dollars have lost a whopping 26% in purchasing power. The Canadian dollar has lost 23%. This is a serious and gross devaluation of what we use for money. Meanwhile, gold has gained 325% in purchasing power (after accounting for inflation as measured by the CPI, which understates the amount of inflation by a considerable amount) and this is while the gold price has gone nowhere since last September.
The problem is, the leak in our economy is only going to get bigger. The monetary base now exceeds $2.6 trillion, up 215% since January 2008; the national debt is over $15.7 trillion and will conservatively reach $20 trillion in just three years; the $1.3-trillion US budget deficit, which is more than the entire US budget was just 20 years ago; the approximate $4 trillion in US Treasuries held in foreign central banks, many of which continue making arrangements to bypass the dollar; the vulnerable and propped-up economies around the globe; the still-unresolved European debt crisis; the many negative real interest rates that show no sign of reversing course anytime soon.
These are massive megatrends that won’t be reconciled without further, serious dilution of the currency – it’s the only politically acceptable way to decrease the debt burden. This is why we’re convinced more money-printing in the U.S. and around the world is highly likely – whether they call it “quantitative easing” or try to hide it under some other guise – especially if we get another deflationary scare. With the only logical choice being to print, gold will be forced higher by an order of magnitude. [Read these articles on the subject:
I say all of the above about gold because I think that is the key to gold stocks. If gold and silver are destined for higher levels, gold stocks will follow. I know they haven’t demonstrated that for a while now, but slumps don’t last forever.
The bottom line is this: Gold stocks do respond when gold goes higher – and gold is going higher because of completely unsustainable fiscal and monetary actions of governments all around the world.
So, will gold stocks really soar again someday?[Absolutely!] The
- historical record of gold stock manias
- the extreme undervaluation of gold equities
- the lack of mainstream participation in our market
- the abundance of available cash
- the dwindling supply and rising demand
- the massive disconnect between gold and gold stocks
- the likely trajectory of the gold price… and last but not least,
- the political compulsion to dilute the currency further,
all point to an incredible opportunity to buy gold stocks at extremely low levels and someday realize potentially life-changing rewards.
Hang in there, my friends. Our time will come. In fact, I predict that someday we’ll wonder why anyone doubted it in the first place.
*http://www.ino.com/blog/2012/06/why-are-we-certain-that-gold-producers-will-soar/ (To access the above article please copy the URL and paste it into your browser.)
Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.