We've spent a lot of time in recent editions making the case for why gold will rebound and what great deals there are out there. We've frequently said that this gold bull cycle will end in a Mania Phase for the record books, and that this lies yet ahead. Doug Casey often says that when the larger world of investors really wakes up to the need to own gold and the potential for spectacular profits in gold stocks, the resulting flood of money will exert a pressure like trying to fit the contents of the Hoover Dam through a garden hose.
Jolly good, but highly poetic. What do the numbers say? Andrey Dashkov takes a look at the relevant facts in his article below.
As a quick—but not irrelevant—aside, it frankly blows my mind how much value investors give the financial sector. Never mind for now its essential Ponzi-scheme, fractional-reserve, and hallucinated derivative nature: just how can it be that the industry of people moving bits of imaginary paper around is worth so much more than any industry of people actually creating goods and services of tangible value?
There's something wrong with this picture.
When the world figures it out, everything will change—and we'll be very glad to be owners of the only financial asset that is not simultaneously someone else's liability: gold.
Senior Metals Investment Strategist
P.S. I have another Casey Phyle announcement to make. A Phyle is forming in Amsterdam, The Netherlands. Anyone in the area who's interested in meeting up with other like-minded individuals to discuss whatever is on your minds, please send an email to email@example.com.
|Rock & Stock Stats||
One Month Ago
One Year Ago
|Gold Producers (GDX)||25.86||26.51||41.59|
|Gold Junior Stocks (GDXJ)||39.28||41.32||75.24|
|Silver Stocks (SIL)||12.65||12.77||17.86|
|TSX (Toronto Stock Exchange)||12,685.13||12,268.29||11, 665.70|
Gold Sector: A Small Fish in a Big Pond
Earlier in July, Jeff Clark showed in his article A Rare Anomaly in the Gold Market that the gold sector is dramatically undervalued based on its price-to-book ratio. In this article, I would like to expand on his analysis and provide some additional context.
In that article, we found only 31 primary gold producers with a market cap over $1 billion. This seemed rather small when one considers just how many stocks trade around the world, so we wanted to compare this to other industries.
The charts below are built from a database of 6,830 companies. They're grouped by industry, and all have a market capitalization of US$1 billion or more. They trade on various stock exchanges.
Here's how the number of gold producers compares to other sectors.
Primary gold producers are clearly a tiny group when compared to the number of companies in other industries at this MCap.
Gold producers with a $1 billion MCap or more are a small subset of the Metals and Mining group, a sector that comprises 229 companies, which in turn is a part of the Materials category that consists of 600 stocks, including companies producing chemicals, construction materials, containers, forest products, etc.
What's staggering is that there are three times as many companies in the Financials group as there are stocks in the whole Materials category. Further, there are 470 real estate companies with +$1 billion MCap within the Financials group. Primary gold producers would be just 6.5% of that subset.
What about the market value of the different sectors? They also vary widely, though the Financials group dwarfs them all.
By market capitalization, billion-dollar gold stocks represent only 12.5% of the total MCap of the Metals and Mining subcategory, which in turn is about 43% of the total Materials group. Billion-dollar gold stocks have a market cap just 0.9% the size of those in the Financials group.
The conclusion we can draw from these two charts is rather obvious: gold stocks are a tiny constellation in a big universe. That's important, because it shows just how very crowded this little area could get when the larger universe of investors turns to the gold sector. If they invest in the bigger companies, there won't be that many to choose from, which could swell stock prices.
In the meantime, gold stocks remain deeply undervalued. Let me build on Jeff's argument that gold stocks are cheap on an historical basis and compare them to other industries' price-to-book values as of July 17.
The gold industry remains the most undervalued sector available to stock investors today. Its latest price-to-book value is 1, the only industry at that level. It is slightly higher than what we reported in the beginning of July because gold has risen slightly since then, and so did many gold miners' share prices. But they remain very cheap, as further evidenced by the Metals and Mining group having a higher P/BV, implying that non-precious metals producers are valued more than precious metals producers, a rare anomaly.
How long will gold stocks continue to be so undervalued? As Louis James wrote last week, we don't try to time or predict the bottom. Those who've made fantastic amounts of money speculating in this sector didn't even try. They made money buying when valuations were ridiculously low… and simply waiting to be right.
That's exactly what we recommend, too—because when investors do return to the gold sector, it won't take much capital for this small minnow to become a much bigger fish.
Not all companies will be equally attractive when investors return, but there are a number of precious metals producers that we're convinced will outperform in a big way, based on important factors—especially their price to tangible book value. They're revealed in the latest issue of BIG GOLD.
Gold and Silver HEADLINES
Indian Gold Exports Slump 70% in June (Mineweb)
Gold jewelry exports from India plunged 61% in May and 70% in June as the impact of severe import restrictions on gold took hold. Over recent years, jewelry exports have been growing significantly, along with markets in the US, Europe, Middle East, Hong Kong, and Japan.
After the government imposed its restrictions, imports of gold bars dropped 65% in June and 48% in May (year on year), which created a shortage for gold manufacturers. Vipul Shah, chairman of the Gems and Jewellery Export Promotion Council, thinks that if the current trend continues, it could be disastrous for the entire industry and usher in large-scale unemployment. Because the gold and jewelry industries involve a lot of workers in India, this could become a serious political issue.
Of course, government interventions have had other unintended consequences, such as gold smuggling. Watch this space.
Dubai Officials Pay for Weight Loss in Gold (Mining.com)
Under an unusual slim-down initiative, Dubai's municipal officials are giving away one gram of gold (worth about $45 at current prices) per kilogram of weight lost. The program is intended to encourage a healthier lifestyle. To get paid, one has to lose at least two kilograms (4.4 pounds) during the 30-day challenge.
The CIA World Factbook ranks the United Arab Emirates as seventh in worldwide obesity rates. Not a bad incentive for gold bugs: lose weight and get free gold.
Our Planet's Gold Came from Colliding Dead Stars (Harvard-Smithsonian Center for Astrophysics)
The Harvard-Smithsonian Center for Astrophysics reports that the earth's gold was born in a cataclysmic event—like the one that occurred last month—known as a short gamma-ray burst (GRB). A unique glow resulted from the collision of two neutron stars, potentially signifying the creation of substantial amounts of heavy elements, including gold.
"We estimate that the amount of gold produced and ejected during the merger of the two neutron stars may be as large as 10 moon masses—quite a lot of bling!" said lead author Edo Berger.
This Week in International Speculator and BIG GOLD—Key Updates for Subscribers
- One of our gold producers delivered high-grade gold exploration drill results last week. The thickness of the high-grade mineralization is excellent.
- One of our favorite exploration teams has acquired a promising new property close to an existing gold deposit and a working gold mine in central Quebec. Read our analysis.
- This gold producer announced significant reductions in spending: good move, or a sign of trouble?
- We don't normally comment on changes in company board members, but this one caught our attention for a very specific reason.