We're writing to you from Vancouver, Canada this week, site of the 2013 Vancouver Resource Investment Conference. We'll have more to say on that subject shortly, as we come here to take the pulse of the mining industry. Meanwhile, Jeff Clark puts his finger on an important issue that explains a lot about the performance of gold mining stocks in recent quarters.
For now, I will make one quick observation: mining stocks are, as a group, rebounding this month, but are still relatively on sale. We're buying.
Without further ado then, I place you in Jeff's competent hands and will be back with fresh insight on the state of the industry next week.
Senior Metals Investment Strategist
P.S. Speaking of Vancouver, the Casey Vancouver phyle is welcoming new members. If anyone in the greater Vancouver area wants to meet like-minded Casey subscribers, please contact the new phyle leaders Chris & Bob at email@example.com.
|Rock & Stock Stats||
One Month Ago
One Year Ago
|Gold Producers (GDX)||45.11||45.75||53.24|
|Gold Junior Stocks (GDXJ)||20.49||20.64||27.04|
|Silver Stocks (SIL)||22.05||22.74||22.76|
|TSX (Toronto Stock Exchange)||12,725.69||12,334.34||12,327.52|
"Wrong Way Corrigan" Analysts
By Jeff Clark, Senior Precious Metals Analyst
Common sense dictates that when you need information or advice on something you're unfamiliar with, you consult with a professional. That's what people do, whether refinancing a home, choosing an insurance product, or fixing a broken heater. While professionals certainly have their own agendas, they still know more about their products or services than others, and can at least help them make more informed decisions.
Bank and brokerage analysts know their products, too. But when it comes to helping you make an informed decision about where the gold market is headed, they have, as Rick Rule is fond of saying, a record unblemished by success.
Every year major banks and brokerage houses provide their four-year forecasts for the gold price. The following chart documents the average price projection of 25 top analysts over the past seven years, many of whom specialize in the resource industry. I might suggest pushing away from your desk so that when your jaw drops it doesn't hit the keyboard.
(Click on image to enlarge)
You can see that every year since 2007, bank and brokerage analysts have as a group predicted that gold would fall, sometimes dramatically, over the next four-year period. For example, in 2007 the consensus of all estimates was that gold would decline from $656 to $523 by 2011. Instead, the price rose 140% to an average of $1,572 that year.
Similarly, they predict this year that gold will fall from $1,665 to $1,515 by 2017. Even if they thought gold would move higher the first year, their best guess was that it was ultimately headed lower. So far they've been wrong every time.
For the most part, these are analysts who do nothing but study the resource markets all day long. It's their job. No one gets it right all the time, but this kind of track record is embarrassing.
The obvious lesson is for investors to ignore price predictions from the major banks and brokerage houses – they just don't get it. I'm sure most readers of this publication already know that.
However, there's a much bigger implication of this data that may not immediately come to mind…
- Why would I as a fund manager or institutional investor buy a gold stock if my analysts tell me the price of gold is going to fall?
Answer: I wouldn't.
If the price of the product a company sells is expected to decline over the next few years, would you buy the company's stock? Its earnings are almost certain to fall. As a manager of millions (or billions) of dollars, you wouldn't buy any investment with this kind of outlook.
There's more. These same banks and brokerages have also been predicting the price of oil will rise (almost) every year. While they've occasionally been right about that, it means that margins for the gold producers would be expected to fall, since roughly 10% of their costs are related to fuel. So again…
- Why would I as a fund manager or institutional investor buy a gold stock if my analysts tell me profit margins are expected to fall?
Answer: I wouldn't.
It doesn't matter that analysts have been consistently wrong. What matters is that if the institutional world believes the gold price is likely decline and/or that margins are likely to fall, they're not going to stick their necks out and buy gold stocks. They could lose their bonuses or even their jobs if their analyst's predictions came true and they'd bet against them.
This could be the explanation for why hedge funds, institutional investors, and other large investors haven't entered this market en masse and could account for the disconnect between the price of gold and the trajectory of gold stocks.
|If institutional investors are largely absent from this market, why is gold rising every year? Gold is not a trading sardine for institutions. Gold is supported by strong physical demand from individuals around the world and from central banks. Read our take here.|
We see the potential in gold equities, as we believe the price of gold is going higher, but big investors with billions of dollars to pour into an market don't. Their money, for the most part, is still on the sidelines.
This phenomenon leads us to predict that someday these institutional investors will enter this sector en masse. Once the facts sink in and the institutional world becomes convinced gold and silver prices will maintain a sustainable uptrend, they'll be much more attracted to the equities – and just as stubborn about changing their minds once they're on board.
Now, it's possible this group may have to be beat over the head by relentlessly by rising precious-metals prices before they enter the industry. They'll have to believe that, say, gold hitting $1,900 again isn't a temporary fluke but a sustainable uptrend. I don't know what price the metal would have to maintain or how long it would have to stay there before they jump on board, but given the above chart, I think it's safe to say they won't be the first to the party. I personally think it will be something along the lines of what we outlined in the recent Hard Assets Alliance letter.
Whenever and however it happens, though, the stampede from institutional investors into this tiny industry will be sudden and dramatic, because they tend to have a herd mentality. No one wants to be left behind. Just like they don't want to risk buying something all their colleagues are ignoring now, they'll rush to own the popular and exciting investment when gold stocks have their day.
The consequence of this will result in dramatically higher stock prices. How high? Well, this group loves to use price models, and fair value for Newmont Mining (NEM), based on its Reserves, would be about $200/share (it's currently trading around $44). And that's at $1,700 gold – as the spot price rises, the value of NEM will rise exponentially, since gold would be rising faster than costs, even when inflation kicks in.
That is why I'm excited about the producers. It's the first place the institutional world will turn when gold makes a sustained move higher. Come the day those investors believe gold is about to become part of the monetary system, that bonds are no longer a safe place for money, that inflation is about to get out of control, or whatever it might be that changes their paradigm, they'll flood into our little market and push share prices higher by an order of magnitude.
When this shift gets under way, we'll already own the stocks that institutional investors will be clamoring to buy. Maybe we should thank them now.
Gold and Silver HEADLINES
Germany's Bundesbank has announced it will bring back home some of its gold reserves currently stored in the United States and France. It will transfer to Frankfurt 374 tons (12 million ounces) of gold from Banque de France in Paris and 300 tonnes (9.6 million ounces) from the Federal Reserve in New York.
Germany began storing its gold reserves "as far to the west and as far from the Iron Curtain as possible" during the Cold War era. Currently more than two-thirds of the country's gold reserves of nearly 3,400 tonnes (109 million ounces), valued at 137 billion euros or US$183 billion, are stored abroad in vaults in New York, Paris, and London. The goal of the German government's new policy is to house more than 50% of the country's gold in Bundesbank vaults in Frankfurt by 2020.
Is this a breakdown in trust between central banks? Time will tell, but the implications of this action contradict Ben Bernanke's statement that gold is held by central banks for the sake of tradition. Central bankers in Germany clearly think that gold is very relevant in today's financial system. The lesson for investors is the same as it is for Bundesbank: store some gold far off in case of local trouble, but keep some of your gold close to home, in case you need it.
Gold Prices to Peak in 2013: GFMS Survey (Mining.com)
In the latest release of Thomson Reuters' GFMS Gold Survey, the company says that it expects 2013 to be a good year for gold. Among the main supportive factors that will return to the fore are loose monetary policies in major economies, ultralow short-term interest rates, rising longer-term inflation expectations, robust purchases from official sectors, and others.
The survey forecasts that gold prices will continue to increase, with an average price of more than $1,800 per ounce over the first half of 2013.
While we agree with the catalysts for a rising gold price, we'll take the other side of the bet that it peaks this year. Not until worldwide money-printing schemes cease, the dollar is a healthy currency, and politicians become responsible with their spending will the gold bull end – and we don't see those things changing this year.
Infographics on Gold Visualized in Bullion Bars (Demonocracy.info)
This infographic shows how little physical gold the world possesses. All of the gold ever mined in history weighs approximately 166,500 tonnes, which is a lot in terms of mass, but this amount in size, if all piled together, would be equivalent to a modest office building.
Slightly over half (84,200 tonnes or 50.5%) of all the world's gold is used in jewelry. Another 31,000 tonnes (18.7%) is held by private investors, with another 29,000 tonnes (17.4%) held by the world's governments.
This Week in International Speculator and BIG GOLD – Key Updates for Subscribers
- One of our exploration-stage companies released an important metallurgical update that should materially improve the project's economics.
- One of our silver producers released its Q3 2012 operational update. We like the numbers very much – and you will, too. Read our analysis here.
- We changed our recommendation on a small gold producer after a recent acquisition.
- This silver producer reported record production levels – and we're buying aggressively at current levels.