Welcome to the new Casey Daily Dispatch, starting with the inaugural edition of Metals, Mining, & Money, which will run on Mondays. Our technology and energy teams will contribute weekly editions as well, and Conversations with Casey will take the Wednesday slot, the same day that it has been published all along. Today, the Casey Metals Team has put together a digest of timely information on our sector, plus an upbeat article from BIG GOLD editor Jeff Clark… just the sort of thing to shore up contrarian confidence during this downbeat swing in our market. This is not just a "feel-good" piece, but an important reminder of why we buy when others are selling.
ROCK & STOCK STATS
|Gold Producers (GDX)|
|Gold Junior Stocks (GDXJ)|
|Silver Stocks (SIL)|
(Toronto Stock Exchange)
My own take: there's nothing "wrong" with gold, nor our stocks. Big volatility is par for the course during the Wall of Worry phase of a bull market, and our strategy of buying in tranches and taking profits is designed to mitigate and make use of the market's bipolar swings. The key ingredient to success here is discipline. Stick with the program, don't get cocky, and above all be sure that you are prepared, psychologically and financially, to treat a big reversal as a buying opportunity. That's how you Buy Low and Sell High.
Without further ado, on to the main event.
Senior Metals Investment Strategist
By Jeff Clark, BIG GOLD
This may sound sensationalistic, but I think the odds are very high that, on average, gold producers will sell in the $200 range before this bull market is over. With most of them trading between $20 and $40, the returns could be tremendous. And while the typical junior won't reach the same price level, their percentage returns will be much greater and potentially life-changing, as you're about to see.
The timing of this article may seem incongruous, given the recent weak performance of gold and gold stocks. But that was the identical situation in each of the past manias: both the metal and the equities didn't excel until the frenzy kicked in. The following documentation is actually a fresh reminder of why we think you should hold on to your positions – or start accumulating them, if you haven't already.
So, are my projections based on some fantastical gold price, or a complex formula for gold stock valuations? Nope. I base my projections simply on what gold stocks have done in the past. And to the surprise of many investors, it's a performance they've logged several times, making the following prices very believable if you're bullish on gold.
It comes with a warning, though:
Caution: the following tables may cause excitement, drooling, or the temptation to go all in. Read and invest at your own risk.
You've undoubtedly read about gold's spectacular climb in 1979-'80. And you've likely heard how well gold stocks performed in general. But most researchers haven't identified exact returns from specific companies during this era.
The reason? Digging up hard data prior to the mid 1980s, especially for the junior explorers, is difficult because it hasn't been computerized. So we sent a couple of researchers to the library to view the Wall Street Journal on microfiche. We also relied on Scott Hunter of Haywood Securities; Larry Page, president of the Manex Resource Group; and the dusty archives at the Northern Miner. (This means our tables, while accurate, are not necessarily comprehensive.)
Let's get started…
The Quintessential Bull Market: 1979-1980
The granddaddy of gold bull markets occurred during the 1970s decade, one culminating in an unabashed mania in 1979 and 1980. Gold peaked at $850 an ounce on January 21, 1980, rising 276% from the beginning of 1979. Yes, the price of gold on the last trading day of 1978 was a mere $226 an ounce.
Here's a sampling of gold producers from this era. What you'll notice in addition to the mouthwatering returns is that gold stocks peaked not until nine months after gold.
Returns of Producers in 1979-1980 Mania
|Campbell Lake Mines|
|Giant Yellowknife Mines|
You'll see there was great variability among the returns of these companies. That's why, even if you believe we're destined for an "all-boats-rise" scenario, you still want to own the better companies.
Today, Barrick is selling for $47.59 (as of November 25). If our mania started now and mimicked the average 289.5% return, ABX would reach $185.36 at its peak. GDX at $54.79 today would hit $213.40.
Keep in mind, though, that our data measure the exact top of each company's price. Most investors, of course, don't sell at the very peak. If we were to able to grab, say, the middle 80% of the climb, that's a return of 231.6%. Barrick would hit $157.80 and GDX $181.68 in that scenario… still tantalizing returns.
And with all due respect to Barrick management, there are majors we're convinced will far outperform the largest gold company in the world in the coming mania.
Here's a sampling of how junior gold stocks performed in the same period, along with the month each peaked.
Returns of Juniors in 1979-1980 Mania
|Mosquito Creek Gold|
|Eagle River Mines|
|Meston Lake Resources|
If you bought a reasonably diversified portfolio of top-performing gold juniors prior to 1979, your initial investment could've grown 23 times in just two years. If you managed to grab 80% of that move, your account balance still would've grown over 1,850%.
This means a junior priced at $0.50 today that goes on to become a Mania Phase winner could sell for $12 at the top, or $9.75 at 1,800%. If you own ten juniors, imagine just one of them matching Copper Lake's return.
Here's what returns of this magnitude could mean to you. Let's say you have $10,000 to devote to a portfolio of the best of the best gold juniors. If our mania someday matches the classic 1980 blow-off top, your portfolio could be worth $241,370 at its peak… or about $195,000 if you manage to grab the middle 80%.
This all assumes, of course, that you sell to realize the profit. If you don't take the money and run at some point, you may end up with little more than tears to fill an empty beer mug. Consider this: many junior gold stocks, including some in the above list, dried up and blew away after October 1980. Investors who held to the bitter end not only saw all their gains evaporate but lost their entire investments, as well. Keep that in mind, because all bull markets eventually come to an end – even golden ones.
Returns from that era have been written about before. So I can hear some investors saying, "Yeah, but that only happened once."
Au contraire. Read on…
The Hemlo Rally of 1981-1983
Many investors don't know that there have been several mini-manias in gold and especially gold stocks outside of the 1979-'80 period.
Ironically, gold was flat during the two years of the Hemlo rally. But something else ignited a bull market. Discovery. Here's how it happened…
Up until this time, most exploration was done by teams from the major producers. But because of lagging gold prices and the resulting need to cut overhead, they began to shrink their exploration staffs, unleashing a swarm of experienced geologists armed with the knowledge of high-potential mineral targets they'd explored while working for the majors. Many formed their own companies and subsequently went after these targets.
This led to a series of spectacular discoveries, the first of which occurred in mid-1982, when Golden Sceptre and Goliath Gold discovered the Golden Giant deposit in the Hemlo area of eastern Canada. Gold prices rallied that summer, setting off a mini bull market that lasted until the following May. The public got involved, and as you can see, the results were impressive for such a short period of time.
Returns of Producers Related to Hemlo Rally of 1981-1983
|Campbell Red Lake|
|Teck Corp Class B|
Gold producers, on average, returned over 70% on your money during this period. While this isn't the same spectacular gains from just a few years earlier, keep in mind this occurred in about 12 months' time. This would be akin to a $30 gold stock soaring to $51.75 by this time next year because it's located in a significant discovery area.
Once again, it was the juniors that brought the dazzling returns.
Returns of Juniors Related to Hemlo Rally of 1981-1983
The average return for these junior gold stocks that had a direct interest in the Hemlo area exceeded a whopping 4,000%.
This is especially impressive when you realize it occurred without the gold stock industry as a whole participating. This tells us that a big discovery can lead to enormous gains, even if the greater industry is flat. In other words, we have historical precedence that humongous returns are possible without a mania, by owning stocks with direct exposure to a discovery area. There are numerous examples of this in the past ten years, as any long-time reader of the International Speculator can attest.
By May 1983 – roughly a year after it started – gold prices started back down again, spelling the end of the bull market. Another reminder that one must sell to realize a profit.
The Roaring '90s
|One of Doug Casey's biggest wins during this time was Diamond Fields. He started buying the stock around 25 cents and later sold at prices as high as $120. You can do the math. To read more about his other spectacular wins in The 1970s Interview with Doug Casey...|
Junior exploration companies were now starting to collect on the "intellectual capital" they'd inherited from the majors. Another series of gold discoveries in the mid-1990s set off one of the most stunning bull markets in the current generation.
Companies with big discoveries included Diamet, Diamond Fields, and Arequipa. This was also the time of the famous Bre-X scandal, a company whose management was later found to have been "salting" drill intercepts.
By the summer of '96, investor interest had sparked a minor mania, and companies with little more than a few drill holes were selling for $20 a share. The table below, which includes some of the better-known names of the day, is worth the proverbial thousand words. And if you're the kind of investor with the courage to buy low and willingness to sell during a frenzy, it can be worth a million dollars.
Returns of Producers in Mid-1990s Bull Market
The average producer more than tripled your money during this period. Once again, these gains occurred in a relatively short period of time, in this instance inside of two years.
Here's how winning juniors performed. Hold on to your hat.
Returns of Juniors in Mid-1990s Bull Market
Many analysts refer to the 1970s bull market as the granddaddy of them all – and to a certain extent it was – but you'll notice that the average return here exceeds what the juniors did in the 1979-'80 market.
This is akin to that $0.50 junior stock today reaching $19.86… or $16 if you snag 80% of the move. A $10,000 portfolio could grow to over $397,000 (or over $319,000 on 80%).
Gold Stocks and the Greater Depression
Those of you in the deflation camp may dismiss all this because you're convinced The Great Deflation is ahead. Fair enough. But you'd be wrong to assume gold stocks can't do well in that environment.
Take a look at the returns of the two largest producers in the US and Canada, respectively, during the Great Depression.
Returns of Producers
During the Great Depression
During a period of soup lines, crashing stock markets, and a fixed gold price, large gold producers handed investors five and six times their money in four years.
If deflation "wins," we still think gold equity investors can, too.
[You can read more about gold stocks during the Great Depression in the April 2009 issue of BIG GOLD (must be logged in).]
Before you sell your kids to buy gold stocks, be aware of the fine print: history may not repeat. There's no law that says we have to get a mania; it's a good bet, we've no doubt, but it could be different than what we saw before – maybe the mania is just in gold and not the stocks… or maybe it's only in certain geographical areas… or it takes longer than what some investors have the patience for.
The point here is simple: don't invest so much that you get wiped out if it doesn't come to pass.
In the end, though, we think the efforts by governments around the world to reflate the economy will work. Throughout history, a fiat currency system has never lasted – not even once. Eventually, they all fade away. And whether or not gold (or silver) are somehow figured into the monetary replacement, the odds are high that we'll see a mania of epic proportions in our industry, as the world's current fiat currencies implode. Truly life-changing gains will be reaped by those with foresight, courage, and cash to act before it arrives.
So, yes, someday we think your favorite gold stock will sell for $200, or more, possibly a lot more.
[Big investment funds are already urging their clients to start buying quality gold mining companies. Read all about it.]
The latest news from our industry that deserves your attention…
World Gold Council Report: Investment Demand Still Climbing
The latest quarterly report outlines a "summary of the factors driving gold demand in Q3 2011, together with forward looking views and opinions on the dynamics and trends in the gold market at a regional and sector level."
The third-quarter gold demand of 1,053.9 tonnes (33.9 million ounces, Moz) increased 6% year on year. Among the three major components, strong investing appetite with diversified geography was a key driving force adding 33% as investors all over the world "sought to protect their wealth, diversify their risk and benefit from gold's strong returns." In the third quarter, central banks continued diversifying their foreign exchange reserves, which resulted in them being net purchasers of gold again. Year-on-year growth reached 385.4% in the second quarter, but in Q3 central bank demand was almost off the chart with a whopping 556.6% annual increase.
Global jewelry demand declined 10%; industrial consumption level remained stable. Q3 gold demand in money value terms showed a strong increase in all sectors.
Summarizing it in chart form reveals amazing growth.
(Click on image to enlarge)
Physical bars and coins demand reached 468.1 tonnes (1.5 Moz) and generated a record quarterly demand value of US$25.6 billion, twice the sum recorded a year ago. In fact, bars and coin demand delivered strong double-digit growth in nearly all markets, except for India, Japan, and the US. Note that crisis-struck Europe generated a growth rate of 135% year on year, which accounted for 30% of world gold bar and coin demand. US investors favored silver coins.
Besides the relevant statistical update provided in the report, the report provides analysis of the evolution of the supply and demand of gold. On the demand side, the authors observe a geographical shift from the West (Europe and North America) to India and East Asia: The latter accounted for 35% of the total gold market in 1970 and 58% in 2010, while the share of demand originating in the west declined from 47% in 1970 to 27% in 2010.
On the supply side, one of the key findings is that South Africa is no longer the dominant producer; now, gold extraction is dispersed across the globe with no single country contributing more than 14% of world production.
The research shows that during the last 40 years, the gold market has become more liberalized, transparent, and liquid. Gold market participants are becoming more geographically diverse and, other conditions being equal, tend to generate stable long-term price trends.
"In Gold We Trust"
Another report well worth your consideration is the In Gold We Trust special gold report prepared by Erste Group. A thorough and coherent review of the state of the gold market, it reaffirms that in times of economic uncertainty, gold is the type of asset that everyone should be invested in:
The global expansion of monetary supply should continue to provide gold investments with a positive environment. The reaction to the current crisis is already feeding into the next crisis. Trying to resolve a crisis with the very same instruments that caused it (i.e., an expansive monetary policy) would seem to be clutching at straws. The driving forces of wealth are savings and investments, not consumption and debt. The weak US dollar is a logical consequence of the quantitative loosening, which from our point of view is just a euphemism for printing money.
Given that the majority of debt has neither been written off nor paid off but simply transferred, the problem of excessive debt is still waiting to be resolved. There has been no deleveraging, only an adjustment of booking entries from the private to the public sector. The quantitative easing has left monetary stability short on credibility, and it will be very difficult to remedy this situation. In this fragile environment gold will continue to thrive.
Packed full of data and charts, this report is a highly insightful read.
JP Morgan Buys MF Global's LME Shares
On November 23, JP Morgan won a bidding competition over MF Global's shares of London Metals Exchange (LME). For an undisclosed price, JP Morgan will increase its stake in the shares of one of the world's leading metal markets.
JP Morgan already has a 6.2 percent stake in the LME, the world's largest metals market place, which has opened its doors to potential suitors. Increasing its stake alters the landscape, as LME shareholders seek to protect their interests, or make a profit, in any eventual takeover.
"We received a great deal of interest in the LME shares and are pleased to be in the final stages of concluding a sale," said Richard Heis, joint special administrator of MF Global UK.
Sources told Reuters on Tuesday that J.P. Morgan would pay 25 million pounds ($39 million) for the 4.7 percent stake in the LME, implying a total value of around 530 million pounds.
JP Morgan has been the target of a lot of criticism for its alleged manipulation of the global silver markets, including LME. Now that the company has more control over one of the world's most important exchanges, one has to wonder (quite skeptically) how things might change.
[If you've been thinking about joining Doug Casey and Louis James as they speculate on the best of the best precious metals juniors, now is the time to take advantage of a special discount on Casey International Speculator. If you prefer the relative stability of the profitable gold and silver producers, Jeff Clark brings you the best information ideas on those every month in BIG GOLD.]
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