Time to Pull the Lever – On Gold
It was great to see many of you at the New Orleans Investment Conference. I was particularly pleased with how many of you joined us for our Q&A session late Thursday night, while everyone was else was hitting the bars or the sack. You had great questions, gave us some good feedback, and I think we all had fun.
The Casey Research Energy Team’s Marin Katusa will be with me at the upcoming San Francisco Hard Assets Investment Conference, if that’s closer to home for any of you who didn’t make New Orleans. I’d love to meet more of you there.
Meanwhile, your metals team thinks there’s an excellent buying opportunity in our favorite market right now, and as per our article below, we urge you to take advantage of it.
Senior Metals Investment Strategist
|Rock & Stock Stats||
One Month Ago
One Year Ago
|Gold Producers (GDX)||51.24||52.40||57.97|
|Gold Junior Stocks (GDXJ)||23.43||23.72||31.62|
|Silver Stocks (SIL)||24.56||24.11||23.59|
|TSX (Toronto Stock Exchange)||12,300.30||12,232.86||12,186.06|
By Alena Mikhan, Metals Team Researcher
Gold closed at $1,716 per ounce last Friday, almost $80 below the peak of $1,791.75 it reached three weeks ago. The drop was widely attributed to continuing global economic uncertainty and speculators taking profits – which means the experts have no idea what really happened. We don’t try to second-guess short-term fluctuations here at Casey Research, but instead keep our focus on the bigger picture.
In the greater scheme of things, a 4.2% decline is not a significant drop for gold; for a savvy investor, it’s another chance to buy bullion cheaper. We’re not alone in thinking that way: Reuters reports that gold holdings of metal-backed exchange-traded funds grew over this period. There are indications that Indians preparing for their festival season pushed demand higher as well.
An even better buying opportunity can be found with the gold equities. While gold was down 4.2% from October 4 to 26, gold stocks fell by 5.3% at the same time.
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The difference isn’t all that big – so why do we think it’s important? First, the decrease would have been much greater if we’d cheated a bit and used the numbers as of two days earlier, underscoring yet again how volatile our market is. Second, the current decline in the sector is likely to be short-lived due to the traditionally stronger fall and winter season we’re entering. Third, the inherent leverage gold stocks carry over the price of the metal should deliver better-than-bullion returns when they rebound – a fact big investment funds have been taking advantage of for some time.
Gold’s rise drove many mining stocks much higher in August and September, but at present they are looking undervalued again. To see why, let’s examine their action over a longer time frame. In the chart below you can see how gold stocks have performed since the beginning of the year, as measured by the HUI (AMEX Gold Bugs Index).
(Click on image to enlarge)
The two highlighted areas are periods where the gold price was about the same. In February and October, gold peaked at $1,781 and $1,791, respectively, and then in both instances, declined to about $1,700. While gold was trading at nearly the same level in both cases, stocks are notably cheaper now than a year ago. Whether they are undervalued depends on the merits of each company, but as a group, the least we can say is that they are a better deal than they were a year ago.
Further, when resource stocks get cheaper in comparison to the underlying commodity – gold in this case – they tend to make up for the imbalance; their rebound is bigger. For example, if we look at the pattern in this year’s dips and recoveries, we see that gold stocks lose more in percentage terms than gold but also outpace the metal bouncing back.
(Click on image to enlarge)
As we have long said: gold stocks offer leverage to gold – in both directions.
Seasonality also matters: October has been historically the weakest month of the year for gold equities, usually followed by a surge in November. Combined, these factors signal that the current weakness is a great buying opportunity.
If you’re looking to buy the dips, this qualifies as one. This is the case for both gold and gold stocks.
When gold rebounds, the stocks will log bigger percentage gains. That’s been a consistent pattern throughout the bull market, so buying a tranche now will bring some attractive profits when the market turns around.
Key point: be picky. It goes without saying that not all stocks will perform equally. Some are poised to do better than others – and some a lot better.
It also happens to be election time in the US, and people will be “pulling the lever” for their preferred candidates soon. Our preference is for gold and gold stocks, and we’re voting with our pocketbooks.
Via the country’s Chamber of Mines, AngloGold Ashanti, Gold Fields, and Harmony Gold signed a deal with South African worker unions, agreeing to a new wage increase and pay structure.
According to the country’s National Union of Mineworkers, unions managed to negotiate salary increases from 3-10.8%. Combined with the increases implemented in July, the cumulative annual wage growth ranges between 11-20.8%.
This agreement between gold companies and unions is expected to end the strikes. This is a good thing, as they not only harmed the individual companies but the country in general: the National Treasury reports that during the strike the South African economy lost 10 billion rand (US$1.4 billion).
The situation remains volatile and bears watching. If it all blows over and the global economy keeps cooling, it’s bearish for platinum prices. However, if the trouble flares up again, more supply disruption from South Africa would be bullish for platinum prices. We’ll continue keeping an eye on this space.
While the festive season approaches in India – traditionally a strong buying period – demand has strengthened as prices hover near recent lows.
“Demand is very good. Diwali is just around the corner and prices are coming down. People are making purchases,” says Chanda Venkatesh, managing director of CapsGold, a bullion merchant in Hyderabad.
Also, retailers report that some buyers prefer coins and bars over jewelry, since the prices are still generally high.
A weak rupee combined with bigger import duties imposed by the state significantly weakened gold demand in India this past year. We shall see if the revival in demand during this wedding and festival season can offset the previous drop in consumer purchases.
- An exploration-stage company pushes its bonanza-grade deposit toward feasibility. We expect the economic study to be released on time and to deliver excellent numbers. The company may get taken over or become a producer on its own – shareholders will win either way. The company is one of our Best Buys – and should be in your portfolio, too.
- Another of our favorite stocks received an important environmental permit for a key project. We are buying.
- This gold producer jumped 9% in one day – see why, and at what price we’re buying.