Saturday, December 29, 2012

What Gold Bubble? Mining Stocks Are Dirt Cheap

When the people fear their government, there is tyranny; when the government fears the people, there is liberty  - Thomas Jefferson
I thought of that quote when I read yesterday that the U.S. Senate has extended the law enabling the Government to search our emails and monitor our cellphones without a warrant.  This country is collapsing...

I wanted to revisit briefly the notion that gold might be in some kind of bubble.  A lot of people have contacted me expressing disappointment with gold's recent behavior and many have dumped their mining stocks or plan to do so.  This is a  mistake.

First, assuming it doesn't drop around $95 on Monday, gold will have completed its 12th straight year of year-over-year gains.  Name one other asset class that has done that.  In terms of reaching a new high, gold did that in August 2011 and the new high was followed by the current price correction cycle.  These cycles typically last an average of 18 months, so we are nearing the end of this correction cycle.

Finally, I was struck by a chart posted by Chartsrus.com which shows the serial decline of gold demand in the western hemisphere.  I wrote about that  HERE  As you can see, based on demand metrics gold is decidedly not in an investment "bubble."

From a fundamental standpoint, the mining stocks, as represented by the HUI Amex Gold Bugs Index of unhedged mining stocks, are as cheap relative to the price of gold as at any time over the last three years. This is actually true going back 10 years. As you can see from the HUI/gold chart I posted in the linked article, the HUI/gold ratio chart has consolidated just above a 3-yr low, after testing the 3-yr low twice. To reinforce the potential bullishness of the mining stocks, the momentum indicators represented by the RSI and MACD are moving higher from an "oversold" condition.

My prediction for 2013 is that it will be a very happy year indeed for anyone aggressively invested in the precious metals and mining stock sector. 
 

11 comments:

  1. With respect, I read a lot of commentary about the declining ore grades seriously affecting the profitability of precious metals miners. In addition to the downward manipulation of gold and silver prices, this is alleged to be a prime cause for the appalling price performance of mining stocks which would put a permanent dampener on them going forward. Any thoughts on this and the validity of that analysis?

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  2. If they feel the need to monitor everything, maybe ia perverse sort of way, they are afraid...........

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  3. Dave, Thank you for the rare Saturday post... I hope you are having a relaxing Holiday. Although I am light on miners right now in favor of capital preservation.. I am chomping at the bit to get back in heavy, and I agree with your thesis. David Collum, in the podcast published today on Chris Martenson's Peak Prosperity.com.. answered the question in simple terms; How can Gold be in a bubble is it is only owned by only about 1% of all financial account holders? Absurd.
    http://www.peakprosperity.com/podcast/80364/david-collum-headed-for-showdown

    I will be right back in with GORO, TGD, PPP, VGZ, and SA as soon as the water looks right to me. Thanks for all you do, 1Kg Lunar Dragon.

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  4. I wouldn't say that gold stocks are dirt cheap, because the total cost has gone from $700/ounce to $1500/ounce in 3 years, while the gold price did just the same thing: going from $800/ounce to $1600/ounce in three years.

    Gold went up, but costs went up the same amount. So actually the gold stocks should stay flat and they did. It's pure science.

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  5. As someone who manages money for a large number of clients, when I first started talking to my clients about investing in gold and gold minining stocks in later 2002, no one had a position. I was questioned as to why I would even bring that idea up. I used to tell people that if they would talk to their circle of friends, that they would find that less than 1 out of 20 would even be considering it. Interestingly, 10 years later and I still find that no one has any meaningful position in gold or gold mining stocks in the retail investing world that I come across. Those early percentages would still apply, based on my experience. They have lots of stock and bond mutual funds...but nothing in precious metals.

    One of the reasons for this may be the financial services industry itself. When talking with other registered representatives or RIA's, I always ask them what they are doing with their clients in that asset class, and seldom do I get any acknowledgement that it even exists. I either get lack of knowledge, skeptical disbelief, or outright hostility. The only people that I run into who do have clients with a position is when the client is driving the purchase and not the advisor. If the advisors don't believe in the value of it, their clients will not hear about it either, or will be encouraged not invest there.

    I also speak with the area coin shops regularly to determine changes in demand, as they seem to be a decent gauge of what is happening from month to month. Generally, people show up at exactly the wrong times to sell and to buy...

    Obviously there are advisors out there who are working in this area, but in percentatage terms, they are very few. I suspect that will change in the next several years as people chase returns. My point is that if a bubble is defined as a high percentage of public participation, the American public is just as far away from gold today as they were 10 years ago. If they have any participation at all, it is to visit a "We Buy Gold" shop to sell grandmother's broken necklace. When the number of "We sell Gold" shops equals the number of "We Buy Gold" shops, I suspect a top will be in.

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  6. Just askin, Albert. Where did you get your info from? Could you supply a link? Also, are you saying 1500 is industry wide or are there exceptions that are able to keep their costs low?

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    1. It's one of my blog posts. The total cost includes exploration, production, maintenance, taxes, mine construction, feasibility studies, etc...

      http://katchum.blogspot.be/2012/12/the-marginal-cost-of-gold-production.html

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  7. Hello David, I enjoy reading your blog and your opinion on the metals.
    I was looking at this technical chartists blog and was wondering if you would mind rendering an opinion. Thanks

    http://chartistfriendfrompittsburgh.blogspot.com/2012/12/gold-top-us-dollar-bottom.html

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    1. Pure hogwash. Dollar chart is actually pretty bearish, if you look at a real, 1-yr daily. I might post a 10-yr weekly chart of gold tomorrow if I get motivated. It will give any chartist a woody

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  8. Very good post. You have positive prediction which is really great.
    ExeterResource.com

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  9. A lot of people have contacted me expressing disappointment with gold's recent behavior and many have dumped their mining stocks or plan to do so.
    LOL Coaching

    blade and soul gold

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