Published October 28, 2016

A Perfect Storm Has Formed in the Gold Market

Editor’s note: Today, the Casey Research team is in New Orleans for the New Orleans Investment Conference. Every year, this conference attracts some of the world’s top CEOs, investors, and freethinkers.

This year’s all-star speaker lineup includes Casey Research founder Doug Casey, Rick Rule, and James Grant. Many of Casey’s analysts will also be in attendance.

Since we’re away from our desks, we won’t be sharing our usual market commentary today. Instead, we have something special for you…

About a month ago, a few of us from the office visited Toronto for an editor’s forum hosted by Sprott Asset Management. If you own any gold or silver, you’ve probably heard of Sprott. Their name is synonymous with precious metals. Like Doug, they’re true industry insiders.

At this year’s forum, Sprott shared some of their best ideas about the gold market with us. Their insights were so good, we felt like sharing them with you today.

We hope you find this information as useful as we did. We’ll pick back up our regular market commentary on Monday.


We’re looking at a “once in a cycle” opportunity in gold stocks.

If you’ve been reading the Dispatch, you might think those are our words. After all, Doug went on record earlier this year and said gold stocks were entering a “true mania.” But that’s actually a direct quote from the Sprott team.

Now, it’s a big deal whenever a top shop gets excited about gold stocks. But it’s a HUGE deal in this case.

You see, Sprott knows the gold market as well as anyone. But they’re not gold bugs. As they put it, they’re “agnostic”…meaning they invest where they see the best opportunities to make money.

Right now, they think there’s big money to be made in gold stocks. As you’re about to see, they like gold stocks for a lot of the same reasons we do.

• Gold stocks are coming out of a historic bear market…

For much of the last five years, gold stocks were in free fall.

The average gold stock lost 80% of its value during that time. Other companies weren’t so lucky. Their stocks went to zero.

According to Sprott, the last downturn “matched prior secular bear markets in price magnitude and duration.” In other words, it was one of the worst gold bear markets we’ve ever seen.

It was such a bloodbath that some investors gave up on gold stocks for good. But the seasoned investors knew gold would rebound eventually. After all, gold is highly cyclical. It experiences booms and busts.

• Gold stocks took off earlier this year…

At one point, the NYSE Arca Gold BUGS Index, which tracks gold stocks, was up 156% on the year. After a recent pullback, it’s now up “just” 85%.

Those are incredible gains for a short period. A lot of investors see these numbers and think they missed their chance to buy gold stocks.

But Sprott says you need to have perspective when thinking about gold stocks…

The chart below shows the last two major gold bull markets since 1970. (If you own gold stocks and are thinking about selling them, take a good look at this chart.)

As you can see, the average gold stock gained 760% during the bull market that began in the early 1980s. During the bull market of the early 2000s, the average gold stock gained 607%.

Also, take a look at the table in the bottom right corner. It says that the last seven gold bull markets have lasted about three and a half years on average. The current bull market isn’t even a year old.

In other words, the current bull market in gold stocks will 1) likely run for a few more years, and 2) the average gold stock could head many times higher.

But these aren’t the only reasons that Sprott’s bullish on gold stocks.

• Gold stocks are still dirt-cheap…

You can see what we mean in the chart below. This chart compares the stock price of large miners with how much cash they generate. A lower ratio means gold stocks are a better deal.

Last year, this key ratio hit its lowest level in decades. This year’s rally lifted the ratio, meaning gold stocks aren’t as cheap as they were a year ago. But, as you can see, they’re still historically cheap.

• Gold stocks are cheap relative to the price of gold, too…

The ratio in the chart below compares gold stocks with the price of gold. The lower the ratio, the cheaper gold stocks are compared to gold.

According to this ratio, gold stocks haven’t been this cheap since the early ’80s. (Remember, the average gold stock went on to surge 760% over the next decade and a half.)

This means gold stocks have a lot of “catching up to do,” relative to gold. Put another way, the price of gold might not have to rise much for gold stocks to skyrocket.

But there’s more…

• The supply of gold is getting tight…

During the last bear market, many gold miners were bleeding cash. To survive, they drastically cut costs.

For a lot of companies, that meant slashing exploration budgets, which is the money they use to go look for more gold.

These spending cuts helped many companies weather the storm…but this came at a steep price.

You can see in the chart below that the number of big gold discoveries plummeted after companies slashed their exploration budgets in 2012.

Now, you might think low gold prices also led miners to cut back on gold production. But the opposite happened. Last year was actually a record year for global gold production.

This happened because companies “high-graded” their mines. In other words, they only mined their best deposits. They did this because high-quality rock is cheaper to mine and produce than bad rock.

This process also helped many companies survive the last downturn. But, again, it came at a steep price. According to Sprott, we may have just reached peak gold production. You can see what we mean in the chart below.

If the gold supply gets as tight as this chart suggests, that could be another catalyst for higher gold prices.

• If you don’t already own gold stocks, now might be a good time to buy some…

After skyrocketing earlier this year, gold stocks have cooled down recently. The HUI Index is actually down 28% over the past couple months.

This has some investors worried. But not us.

As we’ve said many times, it’s natural for gold stocks to take a “breather” after such an explosive start to the year. More importantly, the long-term case for gold has never been better.

Governments are still racking up monstrous debts. Central bankers are still printing money out of thin air. And the stock and bond markets are becoming more fragile by the day.

If you’re interested in gold or gold stocks, do yourself a favor and check out Sprott’s service. The company offers some of the best gold investment products on the planet. You can learn more about their products and services by clicking here.

• REMINDER: If you're at the New Orleans Conference, make sure to come by and say “hi” tonight

Tonight, we’ll be hosting a special cocktail reception at the Hilton New Orleans Riverside. This special gathering will include a short Q&A session where you’ll have the chance to ask Doug Casey, Louis James, Nick Giambruno, Chris Wood, and others from Casey Research any pressing questions you might have.

After the Q&A, you’ll get to enjoy some hors d'oeuvres and cocktails, and mingle with the Casey Research team and other like-minded readers.​​

The event will take place between 7:00 p.m. and 8:30 p.m., in the Compass Room of the Riverside Complex. We hope to see you there.

Chart of the Day

Every investor should own at least a little gold.

Today’s chart shows how you would have done using three different portfolios over the last 40 years. Portfolio 1 is made up of 60% U.S. stocks and 40% U.S. bonds. Portfolio 2 is made up of 55% stocks, 40% bonds, and 5% gold. Portfolio 3 is made up of 50% stocks, 40% bonds, and 10% gold.

As you can see, you would have earned average annualized returns of 7.53% if you owned just stocks and bonds. If you put just 5% of your money into gold, your annualized return would have been 7.63%. If you put 10% of your money in gold, your average annualized return would have been 7.71%, which is 0.18% higher than Portfolio 1’s annualized return.

Now, 0.18% might not sound like much. But this tiny improvement can make a big difference over the course of 40 years. Also, Portfolio 3 had a much lower standard deviation (9.32%) than Portfolio 1 (11.27%) over this stretch. In other words, a little gold can significantly reduce the amount of volatility you experience as an investor.

We encourage investors to put 10% to 15% of their money in gold. If you think gold prices are headed much higher, like we do, you might also want to own gold stocks.

But before you call up your broker, we encourage you to watch this eye-opening presentation. It talks about an event that could radically alter the global gold market just two months from now. If this event goes the way we expect, trillions of dollars could pour into a tiny corner of the gold market.

Click here to watch this FREE video.

Regards,

Justin Spittler
Delray Beach, Florida
October 28, 2016

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