The Golden Truth: What Gold Bubble? Mining Stocks Are Dirt Cheap

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:

AnonymousSaturday, 29 December, 2012
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?
ReplyDelete
Replies
AnonymousSaturday, 29 December, 2012
If they feel the need to monitor everything, maybe ia perverse sort of way, they are afraid...........
ReplyDelete
Replies
AnonymousSaturday, 29 December, 2012
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.
ReplyDelete
Replies
katchumSunday, 30 December, 2012
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.
ReplyDelete
Replies
AnonymousSunday, 30 December, 2012
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.
ReplyDelete
Replies
ariSunday, 30 December, 2012
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?
ReplyDelete
Replies
AnonymousSunday, 30 December, 2012
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
ReplyDelete
Replies
UnknownSunday, 30 December, 2012
Very good post. You have positive prediction which is really great.
ExeterResource.com
ReplyDelete
Replies
LOL Elo BoostFriday, 12 July, 2013
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
ReplyDelete
Replies

Add comment

Why Gold?

Gold is the world's oldest currency. You exchange your fiat currency (dollars, euros, yen, yuan) into gold as an insurance policy against catastrophic Central Bank and Government policies which serve to destroy the value of fiat currencies and destroy democracy.

Gold can ONLY be considered an investment to the extent that it remains significantly and historically undervalued in relation to the fiat currencies against which its value is measured. Otherwise it remains the world's oldest currency and is completely free from the counterparty risk associated with currency by Government fiat (i.e. fiat currencies rely on a Government's "full faith and credit.")

Quote Of The Month Courtesy of "Jesse"

Unfortunately for Larry Summers, Ben Bernanke, and their friends at the BIS, they have not yet figured out how to print physical gold, silver, and other essential commodities, and the world is reaching the point where it might simply start ignoring the New York based markets with respect to essential commodities such as basic materials, oil, foodstuffs, and the like, as they become increasingly irrelevant, fraudulent, and Orwellian. And then where will the financial engineers be, except with no more excuses and no place to hide?

Here is the link to his entire commentary, well worth a read:

http://jessescrossroadscafe.blogspot.com/2010/07/gold-daily-chart-shock-and-awe-for.html

Great Quote From Jim Rogers On Govt CPI Reporting

JR: I mean, we have inflation now. If you go to the shop, whether it’s groceries, or education or insurance or health care, prices are going up for everything. The government lies about it in the US. Some countries lie, many countries don’t: Australia, China, India and Norway. Many countries don’t lie about it and acknowledge that we have inflation. Others lie about it, the UK and the US, but if you go shopping you know prices are up.

Q: Are you saying that the American Consumer Price Index (CPI) published by the US Bureau of Labor Statistics is a lie?

JR: In my opinion, yes, of course it is. Have you looked at it? They’ve changed their accounting several times in the past few decades. When housing was 20% to 25% of the CPI and housing was going up, they didn’t count it, saying rents weren’t going up, and then when home prices started going down, they counted it. It’s the same with many things. It’s staggering some of the tortuous reasoning that the BLS has used over the past 25 or 30 years. When the price of gasoline goes up, they say it’s not really going up because it’s better gasoline, better quality, therefore you’re getting more for your money. I mean, it’s endless, the stuff that they say and for some reason people sit there, although more and more people are catching on, and accept what the government says.

source: www.clusterstock.com

Quote of the Week

"The primary function of a Central Bank is to engage in the massive transfer of wealth from the middle class to the wealthy elite. The Federal Reserve was set up to do this with the blessing and support of Congress." - Dave in Denver

If you refuse to believe the above, please read "The Creature From Jekyll Island: A Second Look at the Federal Reserve" by G. Edward Griffin and then explain to me why the Senate voted down the Vitter Amendment and Congress refuses to pass a law requiring a full audit of the Fed, even though the Fed is using taxpayer-backed money to bailout Wall Street and Europe.