Friday, August 3, 2012

Friday Chart Porn: Value Play Of The Decade

Before I get to the good stuff, I wanted to comment quickly on today's employment report released by the Government.  As we all know by now, the NFP (non-farm payroll report) is one of the most highly politicized and statistically manipulated economic statistics on the planet.  It's gotten to the point at which it's become absurd in extremis the degree to which so-called experts get in front of the public and discuss this report as if it has any meaning at all.  In fact, the only meaning it represents to me is the outrageous degree to which the Government is willing to stretch the truth in an attempt to exert control over the public.  Unfortunately, for the actual 20% of the population that is unemployed/under-employed, this monthly three-ring circus of Wall Street economists, CNBC and the Government has turned truly tragic.

Now on to the good stuff...A long-time colleague of mine sent me this chart which shows the ratio of the XAU mining stock index to the price of gold going back to 1984.  I have not seen anything like this in blogosphere or posted on the usual gold-bug aggregator websites.  The XAU index is composed of 16 of the largest gold/silver mining stocks traded on the NYSE/Nasdaq.  If you are interested, here's the list: LINK  The ratio itself represents the value of the index in relation to the price of an ounce of gold:

(click on the chart to enlarge)

As you can see, despite the 11-year move in gold, which has taken gold from $250/oz to as high at $1900, the market value of mining stocks in general has declined in relation to the price of gold by extraordinary amount since its peak in 1996, when the price of gold averaged around $380/oz and silver around $4.80/oz.  Does this make sense, especially given that the large mining companies have steadily increasing their dividend payout ratio and throwing off record amounts of cash flow?

Either the market is pricing in the expectation of gold and silver selling off to the level where they started this bull market or the universe of mining stocks represents the value play of the decade.

Barring some miracle bestowed upon us by some fantastically imagined divine intervention, the financial, economic and political problems faced by the world are going to continue to get worse.  This would argue against a big drop in the price of gold/silver and in support of the value theme.

The trigger for a massive inflow of capital into the mining stock sector will be the eventual discovery of this asset class by the large institutional funds - pensions, insurance companies, mutual funds, general-category money managers.  As an asset class as a whole, institutional investors globally have less 1% of their asset base invested in the sector.  At the peak in 1980, this allocation was over 6%.   We're talking trillions in capital that will potentially flow into this sector, triggering a mania in mining assets that will at least rival, and likely exceed, the mania we saw in internet and tech stocks at the end of the last decade.

So for instance, the total market cap of all publicly traded mining stocks (gold/silver) is roughly $200 billion.  This is less than the individual market caps of the top 15 stocks in the S&P 500.  Fidelity has a small dedicated mining stock fund that has about $2 billion in assets.  But as an institution Fidelity has over $3 trillion under management.  At some point, just like with the tech bubble, Fidelity will move a lot of capital across many of its funds into the gold/silver mining stock sector.  Sheer investor demand will require it.  This trend will sweep across all large asset management companies.

I'm not going to try and put a timetable on when this investing shift will occur.  But I will say that it is absolutely accurate to say that it's silly to discuss whether or not the precious metals sector is in some sort of "investment bubble" when most of the capital that could potentially flood into the sector and create a "bubble" has yet to do so.   Have a great weekend.

17 comments:

  1. When the cash-for-gold stores turn seller instead of buyer would be a sign of gold mania for me. We ain't there yet.

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  2. Dave are you saying ala Fidelity it may be better to hold larger multiple stocks (not necessarily large asset), IE, above 5 bucks a fund price minimum to gain the most leverage? IMO greater leverage may be with stocks like LSG trading around a dollar per share with recent highs of 4 bucks plus in early 2011. 64 bucks per ounce of resource and close to half that counting inferred ounces.WAG.

    Great chart. Going to hold my mining stocks in my IRA throughmarket turmoil.May add some GTU as per posting last night but not ready to liquidate 50% of IRA.Times may get tough but in the end mining stock value will come through IMO.

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    1. No. If the large cap miners are 3-4 baggers, the good juniors will be 10-20 baggers.

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  3. Laughing my ass off Anonymous. You will be very late to the party. You are certainly one of those people who will say "gold has no value". Gold will become the only thing compared to all currencies, just before the currencies of the world become WORTHLESS. No one will notice mind you. Gold will however, and then, I will laugh my ass off. PERIOD. Rock on all you Gold bugs. It will overcome. Regardless of manipulation, MSM bullshit, and the like. The central banks and the big banks know it. WE just have not felt it...yet.

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    1. Perhaps you misunderstood what I said, white wolf, when I said a sign of "gold mania" would be when the cash-for-gold stores turn into gold-for-cash stores. I'm fully aware of the fact that gold is an asset without counter-party risk and that paper currencies are just IOUs forced upon us at gunpoint by tyrannical politicians and gangsta bankers (IOU-nothing would be a better description). What I was trying to say is that when the average man in the street comes to the realization that gold is something he should own and it's being pushed on him by those same entities which have been acquiring it all along , that to me is an indicator that a top is in the making and that it may be time to take some profit.

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    2. Spot on. Sorry for my misunderstanding your intended analysis. You are very correct.

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  4. Well, where are those huge profits all those mining companies should be publishing and where are the 10 to 20 % dividends the South African miners were paying regularly when gold rallied temporarely in the eighties and nineties ?

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  5. Well I could tell you why...

    Incidentally Louise Yamada has this chart in Jan 2012 on Kingworldnews - http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/1/9_Louise_Yamada_-_Gold_&_Silver_Bulls_to_Continue_Stampede.html

    Very telling is that this ratio broke down during the 2008 crisis and never recovered into the triangle - never mind breaking out.

    The biggest reason why - is that the Goldbugs are predominantly the people who believe in the system failure scenario - every single one of them. And hence I believe they are the biggest sellers of miners and going into physical only. Basically following FOFOA, Andy Hoffman and many, many more. More and more there is the motto if you don't hold it you don't own it. So unwittingly or intentionally the prophecy is coming true - but only in the Gold market - because the rest still believes in the status quo. Hence I wrote some time ago - the biggest "enemy" is within. It is not - as well known people are writing - the hedge fund industry only. It is because they can push the button and the gold bugs have provided everyone with that beautiful button. I might add that even you recently commented to someone who is in miners in his IRA, or something, to take it all out and take the 10% hit and get it into mostly physical - in your hand. Or perhaps I misunderstood.

    And so that void left by the gold bugs selling miners only to even more into the systemic failure camp are buying physical in your hand rather than miners in the system.

    Secondly I also believe taking possession of your certificates is also a smaller issue than thought as the main volume probably is HFT's and they can still do whatever they do. The most recent example is Fridays last 30min trading in miners, although at very very low volumes.

    Thirdly. We are finding out that people we believed to be knowledgable are hardly - mostly like Ted Butler and his COT analysis etc. I am finding out that no one actually has any idea of the physical trade. It is all hidden and we only have these stupid writings of a few who claim to have a buddy here and a buddy there. Was this Wyntor Benton story so different during the rise of Silver, beginning Aug 2010. Surely a big outfit such as Sprott could get to the bottom of this and even he says he has no idea where they get the physical.

    On a little side note - about Rick Rule and his comment at the beginning of 2011 to Kingworldnews - "The miners are over extended and overvalued at present". And then one looks at this ratio chart and one thinks what has he been smoking? You can research the archives yourself.

    I could really carry on and on about comment from Gold Bugs themselves providing just the right fodder for the "invisible hand" to be able to do what they do.

    As the Gold community is the most fearful community and hence they invested or shall I say trading this market and can be manipulated with more fear.

    And one of my most favourite button of all - "QE to infinity" - the Gold Bugs created it and it provides a beautiful button for fear and the Gold market is the most effected by it - not the industries for which QE is there in the first place. Funny also that most Gold newsletter writers advocate that QE isn't the solution. I know that it is perhaps the only solution for the top but below - politically - it is despised - except if every single person gets the 10mill (SEC idea??) to spend as they see fit. Now that would create an economy! Anyway eventually QE will cease.

    Mmh just what someone thinks about during the last few years of where to store one hard earned wealth with no debt.

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    1. The mining stocks have at least one more massive run up before currencies collapse. At least one more. Andy Hoffman has never had an original idea in his life and he can't analyze his way out of a paper bag. I'm the guy back in the summer of 2008 who was begging him to sell his CEF and GTU and convert it into physical. His response: "what for? no reason to."

      The mining stocks will stage a rally that will shock most. Yes, the smartest survival money is going into pure physical, but we still have the massive flow of institutional capital into the miners. That will be their only choice to play the sector because it is impractical for large institutional funds to take delivery of physical.

      Watch and learn...

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    2. Well I have been watching for a while....

      Robbin Griffiths once also commented that the institutions prefer to get into dividend paying "investments" and hence they will rather go into the miners than the physical.

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  6. Ah - what did we expect regarding the CFTC and Silver. We got the taste of it in the last inquiry where James Dimon appeared infront of some sort of committee. One of his comments was something to the effect - "We agreed to take over bankcrupt entities with one condition - we don't take the losses." Something to that effect and as Bear Sterns was then holding the silver shorts JPM was garanteed that the Government would take the losses but JPM was going to "help" get this under control. It is not JPM but the Government behind the Silver story. So it doesn't and will not surprise me what the outcome of the CFTC inquiry will be.

    And according to Chilton - the guy who spends most of his time in the cosmetics department of news agencies to look trustworthy with his peroxided hair, deep tan and shiny clothes - poors a very little cold water on the FT story. But what's done is done. These guys are always but always behind the curve and will always be.

    Perhaps it's also a little interesting - is there a deeper meaning to the timing?? The CME lowers silver margins today and the FT article comes out on a Sunday/Monday morning??

    An observation also with all these inquiries and news agency debates etc to instill trust in the public - is just doing the exact opposite. The more we blah blah the more we cannot trust. It's all a waste of time and energy and MONEY.

    This is the most dangerous situation - The controllers know they are criminals but....

    The enablers don't know they are Criminals.

    When one thinks a little bit about the statement we will start realizing the gravity of this statement.

    The only solution is to accelerate the absolute and total collapse for something new.

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  7. I'd like to add to a comment about about the news on CFTC and Silver.

    I read everywhere still the name of JPM as the culprit - when will we get it into our stupid heads that it isn't JPM it's their client - "THE GUBBERMINT" - the people who are supported by all our votes. Ted Butler also doesn't understand that fact - much like he believed in Gensler and the wolf in sheep's clothing Chilton.

    Anybody who is serious about silver and bothers to research history should read two things. In it there is the history of demonetizing silver and how it was done. These are long reads and that is probably why it doesn't sink in.

    The first is

    Silver Money by Dickson H Leavens - 1939
    http://cowles.econ.yale.edu/P/cm/m04/index.htm

    Here two important aspects of trade between West and East is highlighted. The West never wanted to pay with real value for their goods from China by firstly paying with Opium and the second time with Silver. After they had paid China with Silver the West immediately demonetized Silver! Guess what is happening right now. The West paid with dollars/Treasuries and what do they want to do - devalue the paper.

    The second is a comprehensive research piece - by Charles Savoie. www.silverstealers.net.

    It is important to understand what is written here but because it is long most don't bother or actually have read it but fail to comprehend the gravity of it.

    So in all of this it's the controllers who control this thing through the Government which is the most important aspect here.

    And by the way...

    During 2008 TARP was forced through but what we failed to comprehend then is that this wasn't all. All Government assisted takeovers such as AIG, Bear Sterns. Merril Lynch etc were taken over with one provisor that all losses which would be incurred in the future due to these deals were to bourn by the tax payer. So it's not only the TARP but these future losses - such as the Silver shorts - which will be for the taxpayers account.

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  8. Everyone hold your fire on the CFTC story. Apparently Bart Chilton has informed the press that the story is erroneous. It smells like a plant by Gensler, used as a "trial balloon."

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    1. just saying...

      CFTC judge claims colleague issued biased rulings

      In a notice sent to complainants and their attorneys, Judge Painter
      claims that Levine told him that he had promised former CFTC Chair
      Wendy Gramm “that he would never rule in a complainants favor”.
      Painter’s notice goes on to say, “A review of his rulings will confirm
      that he has fulfilled his vow.”

      http://www.futuresmag.com/News/2010/10/Pages/CFTC-judge-claims-colleague-is-biased-.aspx

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  9. thanks for sharing.

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