Super Bull in Gold?

07/09/2014 9:00 am EST

Focus: STOCKS

Alan Newman

Founder, Crosscurrents Publications, LLC

To be sure, this is an unusual mania—there isn’t even the illusion that the little guy is doing well and that is the reason why the manufactured boom in stock prices has fallen far shy of the desired wealth effect, writes Alan Newman, editor of CrossCurrents.

The Fed’s thesis has been faulty from the get-go. If second quarter GDP comes in below 2%, we believe the Fed will have no choice but to accelerate the process of printing money.

In the long run, this will sharply increase the odds of a period of high inflation, exactly the kind of environment that will favor gold bullion and gold stocks.

In our view, the long move down in bullion since the August 2011 price high of $1920 per ounce and the subsequent consolidation phase finally concluded with the June 19 breakout that witnessed a huge 3% surge, a move equivalent to a 500 point one day gain in the Dow Jones Industrials.

The sideways consolidation in recent months was a constructive sign, precisely the kind we would expect within the framework of a super bull market. If we are correct in our analysis of a super bull market in progress, prices have a very long way to go.

A resumption of the super bull market for gold will mean enormous profits for miners, especially those with proved reserves and low cost mines. Our two core positions remain Newmont Mining (NEM) and Goldcorp (GG). 

Among much smaller miners, Asanko Gold (AKG) and IAMGOLD (IAG) are still favored, though we would stress their very speculative nature. We do not expect instant gratification. The nature of this secular trend will likely take years to play out.

Eldorado Gold (EGO) is one of the best gold miner charts at this point. Costs are roughly 25% lower than today’s price of bullion, which affords protection if gold happens to slump a bit further before resuming the bull run.

Cash on hand exceeds long-term debt, so the financial position is solid and even suggests room for acquisition of depressed assets.

Resistance established by the February and March peaks has now been broken. While there could easily be a pullback, we believe $6.91 should hold and a pullback would be a good time to add to holdings.

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