It’s been hard to make money in stocks this year.
So far in 2016, the S&P 500 and the Dow have both dropped 8%. The NASDAQ has plunged 10%. And the Russell 2000, which tracks 2,000 small U.S. stocks, has plunged 11%.
Global stocks have also sold off. The Euro Stoxx 600, which tracks 600 of Europe’s largest stocks, is down 10%. The Japanese Nikkei 225 is down 11%. And the Chinese Shanghai Composite Index is down 18%.
• Commodities have plunged, too…
Oil is down 21%. Natural gas is down 9%. Copper, oats, and platinum are all down 8%.
• But gold is up 2.7% this year…
It’s one of the only assets doing well. Casey readers know gold is the ultimate safe haven. Investors buy it when they’re nervous about the markets or the financial system.
Gold has held its value for centuries. Unlike paper currencies, governments can’t create more gold whenever they want. The only way to increase the gold supply is to mine more gold. This requires a tremendous amount of time, energy, and money.
In short, nature keeps the gold supply in check. Since 1959, the global supply of gold has only increased 1.7% annually. The U.S. money supply increased almost 7% annually over the same period.
• The price of gold climbed 558% from 2000 to 2011…
Predictably, gold miners responded by mining more gold. From 2009 to 2015, global gold production increased 29%. Last year, miners produced 3,155 tons of gold…an all-time annual record.
On Sunday, Financial Times reported that gold production likely peaked last year.
According to Thomson Reuters’ GFMS metals research team, global production of gold is expected to fall 3 percent this year, ending a seven-year period of rising output.
The CEO of South African gold miner Gold Fields (GFI) also expects global gold production to decline.
We were all talking about how production was going to increase every year. I think those days are probably gone … you are not going to see massive production increases in the industry.
And the CEO of Russian gold miner Polymetal (POLY.L) expects a huge drop in gold production in the coming years.
The fourth quarter last year was in my opinion the peak quarter for fresh global mine supply. … I think supply will drop by 15 to 20 percent over the next three to four years.
• In 2011, gold hit a record high of $1,900 per ounce…
Yesterday, gold closed at $1,089, or 43% below its all-time high. So, even though gold is up this year, it likely has a lot of room to run.
Gold has been trading below $1,400 for 29 months. Many miners have struggled to make money at these prices. To survive, they’ve shelved new projects and cut exploration budgets. These cost-cutting measures have helped companies stay afloat. But miners are running out of gold they can mine profitably at current prices.
The CEO of Barrick Gold (ABX), the world’s biggest gold miner, says falling gold production should boost the price of gold.
Falling grades and production levels, a lack of new discoveries, and extended project development timelines are bullish for the medium- and long-term gold price outlook.
• Louis James, editor of International Speculator, says the industry hit “peak gold” production decades ago…
In terms of rich, easy-to-find gold, we’re long past the peak…as in, by 100 years. And yet production has continued to grow, albeit at lower and lower grades.
There is literally gold scattered everywhere on our planet. At the right prices, any concentration of it anywhere can become economic. However, at $1,000-$1,100 gold, most of that potential “ore” is just dirt for now.
There are plenty of known deposits that are too low-grade to be mined profitably at current gold prices. Some of them have detailed engineering studies that show that they could make money at, say, $1,500 or $2,000 gold. But today, it would cost more money to extract that gold than you could get for it, so it’s not worth it.
• Casey Research founder Doug Casey thinks gold has bottomed…
Louis agrees that there’s much more opportunity than risk in gold right now…
Doug feels that the bottom is behind us. I think we’re scraping along the bottom, and we may or may not see a price a few dollars lower than the last trough, but I don’t think we’ll see dramatically lower prices.
• When the price of gold takes off, gold mining stocks could skyrocket…
That’s because gold mining stocks are leveraged to the price of gold. A small jump in gold prices can cause large gold stocks to jump two or three times higher. And smaller, riskier gold mining stocks can skyrocket. It’s not uncommon for the best “junior” miners to soar 10, 20, or 30 times more than physical gold during a gold bull market.
• Gold mining stocks are cheap…
The Market Vectors Gold Miners ETF (GDX), which tracks large gold stocks, is down 80% from its 2011 high. The Market Vectors Junior Gold Miners ETF (GDXJ), which tracks small gold stocks, is down 88%.
However, simply buying a fund like GDX or GDJX isn’t likely to produce huge gains. That’s because these funds own some high-quality companies…and some low-quality companies.
To make big gains, you need to buy the very best miners. Louis James, Casey Research’s Senior Investment Strategist, finds these companies for a living. Before recommending a stock, Louis personally visits a company’s mines, kick its rocks, and gets to know the management on a first name basis.
Louis’ boots-on-the-ground approach works. Over the past decade, he’s helped subscribers double their money on gold stocks nearly 25 times. And in many cases, the gains were much higher…including gains of 411% and 390%
You can find out about Louis’ favorite gold stocks today by signing up for a risk-free trial to International Speculator. Click here for details.
Chart of the Day
Global shipping rates have collapsed…
Today’s chart shows the performance of the Baltic Dry Index (BDI). The index measures the cost to ship raw materials like steel, coal, and copper. It’s one of the world’s most widely watched economic indicators.
The BDI has fallen every single day this year. Yesterday, it fell 1.1% to its lowest level since the index was established in 1985. It’s now fallen 97% since 2008.
Right now, global shipping demand is weak. The industry also has more ships than it needs. From 2003 to 2007, the BDI soared 426%. Thinking the boom times would last, shipping companies ordered too many new ships. Then the 2008 financial crisis hit. Shipping rates crashed, and they never recovered.
The oversupply of ships continues to weigh on the industry. However, the BDI’s recent drop also suggests international trade is slowing. This is a bad sign for the global economy.
Delray Beach, Florida
January 19, 2016
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