 Casey Files:
Gold Shares: Different
This Time?
By David Galland,
BIG
GOLD, Managing Director
Casey Research
Apr 30, 2008
Doug Casey, my partner and
Casey Research chairman, describes his secret to making life-changing
investment returns - and hanging on to them -- as "Being
bold when everyone else is timid, and timid when everyone else
is bold."
But putting a pleasant-sounding
utterance into practice is far different from just parroting
it.
Especially if you have taken
an interest in gold shares over the last year or so.
That's because gold's bull
market has taken it from $691 a year ago to $918 where it trades
today. That's an increase of 33%. Yet the AMEX Gold Bugs Index
has lagged and is up only 26% over the same period. (Lagged is,
of course, a relative term, because the S&P 500 is down 7%
over that same period.)
However, people don't invest
in gold stocks to keep up with gold... but to outpace the metal
on the upside.
Case in point, before the gold
bull market cooled off for a brief period in 2006, gold bullion
went from its 1999 low of $252 to its 2006 peak of $725, a 187%
gain. But the AMEX Gold Bugs Index went up by an even more impressive
519% over the period.
So, what's going on in today's
market? Are gold stocks going to continue underperforming? Or
is this a time to be bold and position yourself now, in anticipation
of a rebound?
Is It Different This Time?
The most dangerous phrase in
the investor lexicon is "This time, it's different."
Invariably, that phrase is used to explain why an investment
is going to continue in a certain mode even though history screams
that just the opposite should be true.
We heard this in spades during
the dot.com boom. Back then, companies with no profits and a
business plan that would embarrass a high school student were
valued in the hundreds of millions of dollars. "These paper
tigers have to crash and burn," said the few. "No,"
said the many, "this time it's different because..."
The real estate bubble was
no different. "But house prices have doubled and doubled
again. That means you should be selling, not buying houses on
the speculation that they will double yet again," said the
few. "No," said the masses, adding, "this time
it's different because...".
In the context of gold shares,
in order for things to be different this time, the gold shares
would simply flop around at current levels until the gold bull
market ends. After which they would sink back to pre-bull market
levels.
Could it happen? Sure. But
in order for it to be different this time, the following would
have to hold true.
1) Gold producers would
have to realize no significant gain in profitability. That,
even though the price of their primary commodity has risen strongly.
A quick check shows that, for
the fourth quarter of 2007 -- the last quarter for which results
are available -- many of the gold producers rang in record results,
including Goldcorp (NYSE: GG), whose year-over-year profits almost
quadrupled, and Kinross (NYSE: KGC), whose profits increased
322%. And that is just a sampling.
(As an important aside, all
the big gold producers will be releasing their first-quarter
financials within the next couple of weeks. Because gold reliably
traded more than $100 per ounce higher over that period, compared
to the fourth quarter of 2007, we expect to see another round
of record-breaking financial results.)
2) One of the fundamental
tenets of investing has to be chucked out of the window.
That tenet is that investors gravitate to sectors where profits
are on the rise. And gravitate more strongly to sectors where
profit increases are strongest. With the record-breaking improvements
in the gold producers' financials of late, we can expect to see
investors beginning to pile in. Especially considering that most
other major sectors -- financials, banking, housing, transportation,
etc. - are all experiencing record losses. Indeed, if investors
steer clear of the profit-making gold producers, that will be
almost unprecedented.
3) In a period of rising
inflation, investors would have to ignore gold stocks as being
a likely beneficiary. During the last major inflationary
period in the U.S., 1962 to 1982, gold shares rose, on average,
1,503%. Are we in a major inflation at this point? A quick glance
at any news screen or a trip to your local store will confirm
that we are. Is gold no longer an inflation hedge? Again, for
it to cease playing that role would be a brand-new script.
4) Gold stocks would also
have to fail to trade in concert with rising oil prices.
As you can see in the snapshot chart here, historically, there
is a very high correlation between gold and oil.
But maybe higher oil prices
are temporary, and oil will fall to meet gold, versus gold rising
to meet oil? No one can say for sure, but in light of the available
evidence, the safe bet would seem to be sustained higher prices.
In just the last few weeks,
we have heard from the Saudis that they won't be increasing oil
production from current levels (according to many credible analysts,
it is because they cannot)... and from the Russians that they
may have hit peak oil production... and that Mexico, the third
largest oil exporter to the U.S., will export its last barrel
to the U.S. in just 6 years.
In short, for the coiled spring
under gold stocks to fail to be triggered, things would indeed
have to be very, very different this time around.
Raising One Final Question...
But what if the gold bull market
is already over? After all, after touching an all-time high (in
non-inflation-adjusted dollars) of $1,011 on March 17th, gold
fell back as low as $887.75, a drop of 13.91%.
Other than scaring some investors
away from gold, is that correction significant? The answer, again
based on the historical record, is no. Since the gold bull market
began in 2001, there have been 9 significant corrections (defined
as a retraction of more than 8%). The worst of those corrections
have seen gold fall 15.98%, 18.27%, and 27.7%. The average
retraction of all of those corrections is 13.6%, so the latest
is, at worse, fractionally worse than average. It is worth noting
that we saw a very similar pattern back in the 1970s with gold
stutter-stepping higher and higher.
So the latest correction, in
and of itself, is truly inconsequential.
Leaving us to look elsewhere
in order to answer the question of whether the gold bull market
is over.
We think the answer is obvious
and requires only a casual glance at the facts on the ground.
We now have globally raging inflation, a financial crisis the
likes of which hasn't been seen in generations, a massive unleashing
of cheap money by the Fed, a $3 trillion war and governments
trapped into spending without restraint. On that last front,
in addition to the almost mind-numbing financial obligations
to the 78 million baby boomers now retiring, we now have a cacophony
of calls for universal health care in the U.S., and the near-certainty
of a new Democratic president coming into power with the mandate
to deliver just that.
All of which is to say, monetary
inflation is the rule of the day.
Opportunity Knocks
Per above, within the next
couple weeks the big gold-producing companies are going to release
their latest financials -- and they are going to impress, you
can be sure of that. When people compare those results against
the train wrecks occurring in almost all the other investment
sectors, the gold stocks story is going to shine particularly
bright. And, unless this time things really are different, a
bet we wouldn't take, these eye-opening profits should soon begin
to translate into investor interest that unleashes the gold stocks.
Before signing off, I'll share
a final chart, this one from a presentation James Turk (www.goldmoney.com)
recently gave at one of our Casey Research Summits. It shows
the historical trading range between gold bullion and gold stocks,
with the measure of value being gold bullion (versus the U.S.
dollar). As you can see, the XAU index of gold stocks is now
right at the bottom of its trading range... and that the top
of the range is about twice as high from here.
Could the gold stocks double
from here? In our view, that is the by far most likely scenario.
And a scenario that we think the historical record supports.
This opportunity won't last overly long because sooner rather
than later (and maybe as soon as the next wave of financials
are released), the investment masses, led by the deep-pocketed
institutions, are going to come to the conclusion that in this
era of crisis and inflation, the single best place for their
money is in gold producers. Get there first, and you'll profit
most.
###
David Galland is the managing director of Casey
Research, LLC, publishers of BIG GOLD, a unique publication dedicated
to providing actionable research on producing and near-production
gold and silver companies. To learn more about our 3-month, risk-free
trial offer with 100% money-back guarantee, click
here.
Doug Casey
Casey Archives
321gold Ltd
|
