16 Reasons Why I'm Bullish on Gold and Gold mining stocks in 2001+
I like to do these types of lists early in a bull move to clarify my thoughts and also to recheck the criteria from time to time to see if everything is still in place. Let me know what you guys think. Let me know if I'm missing any items (pro or con). George gave me a little bit of feedback already. I will revise the list and publish it again based upon feedback if people find it useful. Most of it is my wording, but some things have been cut and pasted. Overall I'd say the odds of a spike to 350+ gold are well above 80% and the odds of a multi-year bull are probably 60/40, maybe higher. The next 6 months of economic data will tell the tale.
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1) Real interest rates (Short term rates - Inflation) are below 2%. Traditionally gold has outperformed in this environment.
2) Stagflation is a definite possibility going forward given consumer debt levels, corporate debt
levels, valuations on the NASDAQ, NYSE. Greenspan is pumping massive liquidity in the markets. That's why bond yields have stayed high. They're worried about inflation. Given the length of the recent economic expansion, Greenspan may be forced to keep rates low for an extended period of time before spurring "normal" growth again.
3) Demand has exceeded supply by 25% for the last 10 years. The difference has only been made up by Central Bank sales and leasing.
4) Central Bank sales and leases will likely be nearing completion or will decrease from current levels over the next several years. Additionally there will be political pressure on Governments not to sell/lease their remaining gold reserves if the price of gold starts to trend upward. Historically CB's have sold at the lows and hoarded at the highs.
5) Gold carry trade is getting less profitable and very risky. Current short interest amounts to several years of supply. Big brokerages like Goldman Sachs have heavily shorted gold. Since this strategy was so successful for so long the unwinding of these positions could cause a massive short squeeze.
6) Gold mining shares and gold market are tiny. All gold companies on all 3 US exchanges were less than 30 billion in market cap at the start of 2001. If mutual funds hedge their risks and merely make 1% of their portfolios gold mining shares the market will soar.
7) The US dollar is due for a fall due to record ownership by foreigners, falling US productivity, and a record trade gap. Falling dollar not only makes gold cheaper on relative terms it'll start to show the inflation present in the economy that's been masked by a strong Dollar (cheap imports). The Fed will face a challenging choice between protecting the value of the currency and stimulating economic growth.
8) Gold has been in a bear market for the last 20 years. Traditionally the longer the bear, the better the corresponding bull (when it comes). So far this rally has gone unnoticed for the most part and bullishness remains very low.
9) Positive divergence. In the best gold rallies the XAU and the HUI (gold index) lead. Forget about
the price of gold. The XAU and HUI are telling you something about smart money moving in. Since Nov 2000 the HUI index has gained 60% while the price of gold stayed relatively flat until recently.
10) Technical indicators all pretty positive. Gold has successfully held the lows around 250 several times now. Breakout occurred when gold broke $275 and surged to $283. Last time gold ran from $35 to 800 in the late 70's to early 80's. This rally started at $250. On a percentage basis $400-800+ could be easily attainable.
11) Risk/Reward ratio great on many of the mining stocks. Most of these stocks are still near historic lows. Buying small caps junior plays is really like buying an option on gold. You may lose 50% from these levels if gold goes back to 250 or below, but the upside is 200-500%+ if gold merely returns to $400+.
12) Silver may be starting to show signs of life after a long bear market. Traditionally gold and silver move together with silver outpacing gold's gains. Warren Buffet is on record for buying about 5-10% of the silver market just 2 years ago. He was a little early getting of out techs, but he was eventually proven right. Once again he was early on buying silver, but do you really want to be against him being proven right eventually?
13) Similarities between today and the 70's. In the 70's we had the nifty 50 that was eventually followed up by 2 year bear market. In 2000 we saw the Nasdaq go to PE levels that rivaled Japan's equity bubble. In the 70's we had an energy crisis brought on by several years of under investment in the sector. Our current energy crisis seems to be worse in scope than the 70's since we are low on natural gas supplies, refining capacity, and oil. Our dependence on OPEC is much greater than it was in the 70's. Will these prolonged energy prices eventually filter through the economy as inflation? Or will they cause growth to slow enough to force Greenspan to spur growth through reckless money supply creation. Seems like both are already happening.
14) Gold has reached a price where marginal production is being shut down (exactly the same as oil when it dipped below $15). Eventually this is a self-correcting process for getting gold to move higher again. Even if the price rises new supply will not come to market for some time as major players will remain skeptical of the staying power of the move.
15) Gold can rise on more than just inflation worries. Gold rises when people lose confidence in fiat currency for whatever reason. What that happens, they recognize that a fraud has been perpetrated by the banking system and governments who permit the debasing of currency to occur. So, gold frequently rises during times of deflation as well as inflation.
16) Consolidation of the gold industry should be good for pricing power eventually.
Potential Negatives
1) Central banks may kill any rally with further gold sales or fixing the price of gold at a set rate.
2) The US economy may start to recover this fall. Greenspan can then start to raise rates again thereby cooling inflation fears.
3) Mining companies may hedge large amounts on any price spike since prices have been depressed for so long. Banks may force many of the smaller miners to hedge given the questionable nature of many of the balance sheets.
4) The Dollar may go on to new highs. So far falling productivity, economic growth and rate cuts have failed to cause the Dollar to fall in value. The Dollar is a bubble and it's very difficult to predict exact tops. Greenspan is currently defending the US Dollar as well.
5) Gold still has very few industrial uses. Younger generations that are inheriting gold don't value it in the same way as their parents did who lived through numerous wars and political upheavals. These younger generations are more inclined to sell their gold when inherited.
6) Energy crisis is getting long in the tooth. There are some signs that OPEC is starting to cheat. We have a record amount of rigs drilling for natural gas. Eventually when oil and natural gas prices come down significantly inflation fears may abate. The economy and the stock market may get a big boost causing money to flow out of defensive and inflation hedging issues such as gold.
7) Gold lease rates are running around 2% now or roughly double the rate they have been at during the last couple years. A higher lease rate discourages short selling of gold. If lease rates were to go down steeply, that would be a major negative for gold. |
