There's a huge divergence between the price of bullion and the prices of mining stocks…and when that gap closes, there will be plenty of profits, writes Lawrence Roulston of Resource Opportunities.
The gold price is up 10% this year, while gold company share prices are down sharply—in some cases by more than 50%. That divergence was quantified in a recent article by the noted gold watcher and highly successful fund manager Frank Holmes.
That article notes that only once in the past 30 years have gold companies traded at a lower level relative to bullion, and that was in late 2008 after the global financial crisis. That research notes that in 2008, and at other times when equities got so far out of alignment with bullion, the equity prices came back into alignment fairly quickly.
I've previously pointed out some of reasons for that growing disconnect between equities and bullion, including:
- the safe-haven buying that predominates the gold market;
- and the strong presence of Chinese investors who have less knowledge of the global mining industry.
The Holmes article also notes that some analysts are concerned by the rising cost of gold mining, and are therefore less willing to invest in gold mining companies.
Holmes notes that while costs are rising, profit margins are still growing: “The average senior gold miner now has more than twice the amount of cash flow; mid-sized intermediate gold companies’ cash flow has more than tripled.”
With strong cash flows in the gold-producing companies, there is continued pressure for those companies to replace reserves and grow their businesses. In that context, the exploration and development companies are more important than ever—and more attractively priced than at almost any previous time!
The silver price is at twice the level of a year ago, and base-metal prices remain strong. Silver and base-metal mining companies are also generating huge cash flows, and are also looking to buy new deposits.
The investing world is even more uncertain today than it was a few months ago. Commentators and analysts are focused on the negatives. As we all know, there is no shortage of negative news.
Analysts and the media tend to focus on the near-term. We are always hearing about what is happening today and what happened yesterday.
But to understand what is going to happen tomorrow, it is very useful to step back for a moment and look at the bigger picture. The longer-term trends are more important to investors than the day-to-day events.
Amid all the uncertainty and fear we face at this moment, there are some tremendous investment opportunities. The best part is that there are investments that provide long-term security at the same time they offer growth potential.
The mining industry needs new deposits. Juniors that deliver those deposits will generate big returns for shareholders. And here we are at the low point in the seasonal cycle.
Clearly, this is a time to begin buying, on a selective basis.
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