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It’s Time to Buy Gold Mining Stocks
10/14/2011 7:30 am EST
Gold bullion has made a big run, and while there is upside there, gold mining stocks have a big comeback underway, especially the larger miners, say Jon Markman of Trader’s Advantage.
If you’re not investing in gold mining stocks now, you should be.
Why now? Analysts at TIS Group reminded me in late September that not only are gold mining stocks very cheap now versus gold bullion, but this also happens to be the best time of the year to buy the stocks.
The gold miners’ cycle usually bottoms in August and peaks in March, putting us just a bit after the start of the strong period.
That makes it buying season for gold mining stocks. The rise in gold miners during last year’s buying season was fairly dramatic.
From August 31 last year through the following 14 weeks, the Market Vectors ETF Trust (GDX), which is comprised of the larger miners, was up 28%, while Market Vectors Junior Gold Miners (GDXJ), comprised of smaller producers, was up 48%.
Members of my service captured a bunch of those gains. That was at a time when gold itself was up only 20%, but looking back, that was when gold started its trajectory from $1,300 in November to almost $1,900 (and it’s still near $1,700 now).
Gold mining stocks then went sideways, in anticipation of the end of the US Federal Reserve’s second round of quantitative easing (QE2) at the end of June, but have now broken out again.
Why would the miners improve?
First, TIS analysts say the miners have had to deal with rising input costs, like oil, over the past ten months. Looking ahead, those costs are likely to rise at a slower pace.
Second, the stocks are cheap. Some are trading below ten times earnings, and most have ditched their hedges.
So if gold does indeed shoot over $2,000 in the next few months, as some have predicted, it’s fair to expect margin expansion and good earnings growth in a no-growth world.
Gold Mining Stocks Under-Owned
TIS also points out gold mining 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 or gold stocks.
If market conditions persuade them to double their weighting in gold shares, it would cause $300 billion in new buying that would leave shares in shortage.
You may be surprised to learn that most pension funds and individuals have not been investing in gold mining stocks or the metal itself, even though gold has been the trade of the millennium. With short rates at near zero, and "real rates" (bond yields minus inflation) under zero, gold’s lack of a dividend—a major consideration for fund managers—becomes less of an issue.
While it may seem gold can’t get much higher, remember that this has happened before.
The move from 1973 to 1980 featured an explosion in price from $100 to $875. That was parabolic, and we could see it happen again if politics remain unstable, inflation swells higher as the Fed floods the economy with more money, and real interest rates remain roughly negative.
Gold rose roughly $500 an ounce during QE2. How far could it go if the Fed goes for QE3 at some point?
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