After an impressive run over the last two months, I’ve recommended clients book profits in their gold and silver positions. Profit taking has hit the sector, pushing the Global X Silver Miners (SIL) and the Market Vectors Junior Gold Miners (GDXJ) down to threaten a break of their 20-day moving averages for the first time since October.
We had some good runs, including a near 20% gain in Great Panther Silver (GPL) and a 7.5% gain in the SIL fund over a few weeks.
But I’ll be back after the selling has run its course.
The sector remains one of the best-looking areas in the market right now after years of outright neglect since the inflation scare of 2011. In a market where valuations are growing increasingly stretched, it represents a rare area of true value and a hedge against the likelihood that the trillions in cheap money the Federal Reserve has poured into the financial system will eventually result in higher inflation and less purchasing power for the U.S. dollar.
Although I stand apart from the monetary policy true believers, I’m not alone in worrying that the greatest experiment in paper money abuse in human history won’t end with rainbows and unicorns. Indeed, former Bank of England, Bank of Canada and Bank for International Settlements economist William White recently admitted that not only can’t central banks agree on what the major threats are (inflation or deflation?) but are essentially making things up as they go given the unprecedented nature of the situation we’re in.
When I hear that, I lose confidence in the future purchasing power of the dollar.
Moreover, the market for gold, silver and other precious metals will be bolstered by a tightening supply situation as many high cost, unprofitable mines have been shuttered.
According to Barclays Capital, the current marginal cost of new gold production including capex is more than $1,300 an ounce now and has been marching steadily higher for years as new metal deposits are increasingly hard to find and located in increasingly unfriendly parts of the world.
Labor and political unrest also threatens the supply situation. Just look at the platinum group metals. Russia and South Africa account for the bulk of production of these metals, which also play an important industrial role in catalytic converters amid tightening emission regulations. Labor unrest in South Africa is a frequent occurrence. And Russian miners are faced with the threat of economic trade sanctions due to the situation in the Ukraine.
At the same time, physical demand for gold was strong, both for coins as well as bullion by central banks in Asia. Demand for coins alone was up 63% through the end of the Q3 2013, according to the Wall Street Journal.
All things considered, there’s a lot to like here.
It’s just time to step away for a little while.