Taking the Pulse of Gold Stocks

Posted On Apr 13, 2012 By Dave Gonigam

Dave Gonigam – April 13, 2012

  • A date for $2,000 gold… and a chart to buttress the forecast
  • Gold stocks stuck where they were more than two years ago… Chris Mayer, Rick Rule assess what’s gone wrong and what to do from here
  • Hopscotching the world: (Still) another plus for Burma… while Greece reverts to barter
  • The perpetual curse of “homes as ATMs”… a TSA one-liner… One-click access to Chris Mayer’s “online adventure tour”… and more!

   Gold is ending the week doing a little more backing and filling. After yesterday’s run-up, the spot price has pulled back to $1,665.

$2,000 looks far off in the distance. To say nothing of last September’s $1,900 high.

Then again, it could happen with the snap of a finger.

   “A push on toward $2,000 is definitely on the cards before the year is out,” says Philip Klapwijk, “although a clear breach of that mark is arguably a more likely event for the first half of next year.”

Mr. Klapwijk is global head of metals analytics at the consultancy Thomson Reuters GFMS. The catalyst for $2,000 might well be, in his estimation, Spain. A meltdown there — coupled with continuing strong demand from China — could give gold a whole new “safe haven” glow.

That said, he also sees a short-term dip to the year-end 2011 level of $1,550 within a couple of months. You’ve been warned.

   “U.S. investors might sleep better at night with an allocation to gold in the face of continued negative real interest rates,” says U.S. Global Investors chief and Vancouver stalwart Frank Holmes.

“The chart below shows how gold has historically climbed when interest rates fell below 0%, with a ‘strong correlation from 1977-84, and again recently when rates turned negative in early 2008,’ according to Desjardins Capital Markets.”

The blue line on the chart is the very definition of “financial repression” — interest rates held below the rate of inflation. And the red line is how you combat it.

   Keeping the faith with bullion is one thing. Keeping the faith with stocks has been, well, more of a challenge.

The HUI index of major gold stocks has bounced off lows hit earlier this week. Cold comfort in light of the fact the index sits where it did in August 2010. Or for that matter, November 2009.

“‘Cheap gold stock’ is a redundancy these days,” says Chris Mayer, “as nearly all gold stocks look cheap. While the gold price has held steady, gold stocks have lagged it. In March, that gap was the widest it’s been in the last 12 months.”

“Gold stocks trade at only half of their historical multiples of the last dozen years,” Chris goes on. “Yet gold miners enjoy the highest profit margins and cash flows they’ve had in decades.”

What gives? “Gold management teams are usually lame. All they want to do is take what they earn and put it back into the ground to find more gold. It doesn’t matter if it makes sense to do that or not. Or maybe they blow the money on an expensive acquisition. Shareholders are often an afterthought. One way you can see this is to look at dividends paid. Only technology stocks pay out less of their earnings to shareholders.”

“Many analysts,” adds another Vancouver favorite, Rick Rule, “myself prominently among them, were dismayed at the gold mining industries’ abysmal corporate performance during the last decade.”

   But this is starting to change. “Even as the [gold] equities prices continue to decline,” says Rick, “corporate performance is increasing, and increasing dramatically.”

“A cursory look at producers’ income statements tells a dramatic story: Earnings and cash generation, on a per share basis, are increasing in dramatic fashion. Capital expenditures are increasingly funded with internally generated cash, rather than equity issuances or debt.”

Some producers are even — gasp — paying a dividend. Newmont is raising its dividend as the price of gold rises.

So keep the faith, Mr. Rule advises: “Recognize that markets work, but only in the longer term. If you can’t handle that, find another avocation. The cure for low prices are low prices; the cure for high prices are high prices. In order to sell high, you must buy low.”

[Ed. note: As for the tiny “junior” gold explorers, Rick says: “Understand that the junior gold sector is a trap; it is valueless. Individual issues can make you fabulously wealthy, but the sector will inevitably bankrupt you if you buy the sector. Stock picking is the key.”

Byron King has a basket of individual juniors in his Energy & Scarcity Investor portfolio. And through next Monday only, we’re offering this premium advisory at half off the regular fee. Subscribe now and you’ll also get the skinny on his favorite tiny oil play.]

   The cost of living rose “modestly” last month, in the estimation of the Labor Department. The consumer price index rose 0.3%.

The biggest factor was rising gasoline prices… but even the “core” CPI for people who don’t eat or drive rose 0.2%.

Year over year, the increase in the headline number works out to 2.6% — down from 2.9% the month before.

Put it all together and the numbers “boost the view the U.S. Federal Reserve has room to provide more support for the economy if needed,” says a Reuters report channeling conventional wisdom.

   Fat lot of good conventional wisdom is doing for stocks: Whatever momentum the major indexes built up yesterday and the day before has gone poof today.

As of this writing the Dow has drifted back to 12,900, the S&P to 1,375. Lacking any obvious explanation, the financial media have settled on Chinese GDP. The first-quarter number rang in at an annualized 8.1% overnight; the “expert consensus” was counting on 8.3%.

   As the S&P lost 4.3% between in the week from Wednesday, April 4 through this last Tuesday… owners of stock mutual funds bailed big-time.

Equity funds saw their biggest outflows of the year during that week, according to Lipper. The total was $7 billion — close to 1% of all the assets invested in such funds.

This is three straight weeks of outflows. The last time that happened was in October — right as the S&P bottomed at 1,100. For whatever that’s worth. Probably not much…

   Oil is in retreat today. A barrel of West Texas Intermediate goes for $103.10.

Barring a sudden spike before day’s end, it looks as if Abe Cofnas will go 7 for 7 on the sample trades he’s brought us in The 5. On Monday, he suggested a trade betting that oil would stay below $105.25.

That’ll be good for a 12% payout in four days. Not as big as the 20% or so he’s averaged in previous trades… but we won’t quibble!

   Suspending Western economic sanctions would “send a signal that we want to help see the changes that can bring the growth of freedom of human rights and democracy” says British Prime Minister David Cameron on a visit to Burma.

If it comes to pass, that would be one more investment catalyst in a country that has the proven capacity to triple its rice exports and grow its mineral exports 25-fold.

Cameron paid a call today on Aung San Suu Kyi — the pro-democracy activist kept under house arrest for 17 years, now elected to parliament. “[Burma] shouldn’t be as poor as it is,” he told her. “It shouldn’t have suffered under dictatorship for as long as it has, and things don’t have to be that way.”

Burma is one of many stories of “frontier” markets teeming with opportunity. Chris Mayer identifies some of his favorites in the “online adventure tour” we arranged to coincide with the publication of his book World Right Side Up. This webinar hosted by Laissez-Faire Books executive editor Jeffrey Tucker is now available to be viewed at your convenience.

It’s absolutely free. Click here and we’ll sign you up for Jeffrey’s new e-letter and give you instant access to the webinar.

   At the other end of the opportunity spectrum, there’s Greece — where folks are now reduced to barter.

Last month, we told you about the “Potato Revolution,” in which the modern food distribution system is breaking down and farmers are hawking their wares directly to consumers.

Now comes word of entire flea markets with an alternative medium of exchange.

“The handicrafts stall at Volos central market lies at the end,” reports the BBC’s Mark Lowen, “just past the homemade jams. After perusing what there is on offer, Hara Soldatou picks out a set of decorated candles, delighted with her purchase. ‘They cost me 24 TEM, which I built up by offering yoga classes,’ she says.”

“If you have goods or services to offer, you gain credit,” Lowen explains, “with one euro equivalent to one TEM. You can then use your ‘savings’ to buy whatever else is being offered through the network.”

As with the potato exchange, most of the transactions are arranged online. Euros might be scarce, but as long as people have goods to unload or services to offer, trade can still take place. “We have reached the bottom of our lives,” says a vegetable seller named Tasos, “and we now have to think in a different way.”

   Here comes Ron Paul’s best chance to defeat the Fed… at least in a video game.

Developer Daniel Williams has already raised $5,000 from 40 contributors via the “crowdfunding” site Kickstarter. “I love video games, and I’m a programmer by trade,” Williams tells The Raw Story news site. “Programming video games is kind of a hobby of mine.”

“I’m the lead programmer on a site called RonPaulSwag.com, where we sell T-shirts and promote liberty to younger crowds. A video game was kind of the next step for me.”

Ron Paul: The Road to REVOLution it’s called… and as video games go, it’s purposely old-school.

Williams plans to release it free online this summer, although he’s working on a version for Xbox Live Arcade, too.

   “It seems everyone still wants a house to be an ATM card,” a reader writes, winding down our discussion of the housing market this week.

“Is it not true that investors buy for investing, and the family — or future family — buys a home to live in, to own, to have shelter and to eventually own, outside of property taxes and insurance?”

“It all got screwed up with the government and the finance industry, one buying votes, one with pure greed, and a central bank driving economic growth to the hilt. I’ll let you pick which one you think was the greediest.”

“Anyway the point of homeownership is secure shelter, not an ATM. For the personal residence, buy the damn thing, get it paid for and then turn that interest you were paying into future investments. The people who didn’t use their homes as ATMs are doing just fine today and will retire comfortably. It appears those may be few and far between.”

“This whole calamity is a poor mind-set, brought about by greed and instant gratification and a liberal mind-set that everyone should live equally, whether they have the means and ability to live that way or not. I wonder where that came from. Who cast the votes that filled the chairs that wrote the programs and implemented the laws that have created this monster we now face?”

“It wasn’t me. I didn’t vote for any of these people, Well, I did vote for Tricky Dick when I was 18, my first go-round.”

   “Hey guys,” writes another after yesterday’s issue, “give private equity a break, Blackstone was a great buy in March of ‘09, and you’d have tripled your money since. Let’s hope we don’t need a repeat of ‘09 to do the same with Carlyle.”

“As for the TSA, just try to think of it as George W. Bush’s version of FDR’s CCC (that’s Civilian Conservation Corps for you young guys). CCC did some really great work in the national parks, etc., all by hand, so you can see the analogy with the TSA.”

The 5: Everyone’s a comedian…

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. “This is a very exciting book,” writes Laissez Faire Books executive editor Jeffrey Tucker in his just-released review of Chris Mayer’s World Right Side Up. “It weaves history, geography, economics and firsthand reporting into a marvelous tapestry, one that is as beautiful as art and as complex and varied as the world itself has become in our times.”

Jeffrey leads Chris on an “online adventure tour” during a webinar that’s now available for you to watch.

It’s absolutely free… and at the end of the video, you’ll have a chance to get a signed copy of Chris’ book, plus three months of access to his Capital & Crisis advisory… all for the same price Amazon will sell you a mere unsigned copy of the book.

You can get instant access to the webinar — and receive Jeffrey’s new daily e-letter — right here.

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