Gold mining stocks are very cheap now vs. gold bullion, and this is the time of year, from a seasonal perspective, to buy those stocks. The cycle usually bottoms in August and tops in March, which makes now a bit beyond the start of the strong period.
The move higher in gold miners over the past year has already been fairly dramatic, even though it stalled for 10 months. From Aug. 31, 2010 through the subsequent 14 weeks, the larger producers in Market Vectors Gold Miners (NYSE:GDX) exchange-traded fund rose 28%, while the smaller miners in Market Vectors Junior Gold Miners (NYSE:GDXJ) ETF were up 48%.
During that same time frame, gold itself was only up 20%. It kept rising from $1,300 an ounce in November to about $1,850, while the miners’ shares were stuck.
Why would the miners improve now? TIS Group points out that one problem the miners have had over the past 10 months is that their input costs, like oil, were rising. Now those costs are likely to decline, or rise at a slower pace.
Second, the stocks are cheap, some trading at below 10x earnings and most have ditched their hedges. If gold shoots to over $2,000 an ounce in the next few months once central banks launch another wave of quantitative easing, it’s fair to expect the miners to experience profit margin expansion and good earnings growth in a no-growth world.
TIS also points out that the stocks are under-owned. The total value of all gold mining shares in the world is about $240 billion, but less than 1% of all global pension fund assets hold gold and gold shares. If they decide to double their weighting in gold shares, it would cause $300 billion in new buying that would leave shares in shortage.
Most pension funds and individuals don;t allocate any money to gold or gold miners, you may be surprised to learn, even though gold has actually been the trade of the millennium, as I have showed you in the past few weeks. With short rates at near zero, and “real rates” (bond yields minus inflation) under zero, the fact that gold pays no dividend becomes less of an issue.
While it may seem gold has already run a lot higher, its move during 1973-1980 featured an explosion in price from $100 to $875. That was parabolic, and that could happen again if politics remain unstable, inflation swells with more printing and real rates remain roughly negative.
Gold rose roughly $500 an ounce during QE2. How far could it go when and if QE3 is initiated? Think about that, because we may be only a week away, or at the most three months, from it happening.
For more guidance like this, check out Markman’s daily trading service, Trader’s Advantage, or his long-term investment service, Strategic Advantage.
