“Surely,” some say when it comes to precious-metals prices, especially gold, “we must be at the bottom.”
After all, as we talked about earlier this week, gold’s been in a “terrible, horrible, no-good, very bad slump.”
We’ll only know the bottom when we see it in the rearview mirror. But there IS reason for optimism. Six big reasons, actually.
Let’s put it this way: Conditions like these are setting us up for a potential windfall, the likes of which we haven’t seen in 30 years!
And it may seem counterintuitive, but there’s even more reason to be optimistic about gold miners than gold itself! I’ll explain in just a moment.
First, let’s look at what Central Banks are doing …
Reason for Optimism #1:
Central Banks Are Buying Gold
You can see that central bank gold reserves added over 15 million troy ounces to their reserves last year. Net central bank purchases of gold jumped by 16% to a 48-year high of 532 tons in 2012, according to the World Gold Council.
And that buying has continued this year, with the world’s central banks adding another 1.9 million troy ounces in just the first two months of this year.
Central banks have a front-row seat at the primary reason to own gold. That is, the central banks are cranking up the printing presses for paper money.
The banks want gold to counterweight all the paper they’re shoveling out the door. But why isn’t all that new paper money boosting inflation?
The reason is simple. Inflation is a function of demand. And the world is still recovering from the financial crisis/recession it entered five years ago. Heck, in Europe’s case, austerity is making the recession worse.
Still, pent-up demand is coiling up. Europe aside, the global economy is improving. These are conditions that are ripe for inflation to reignite. That’s probably what the central banks are getting ready for.
Reason for Optimism #2:
The Cost of Mining Is Rising
World cash costs for gold miners rose 12% to $738 an ounce in 2012, compared with $643 in 2011. Total production costs, including depreciated capital expenditures, increased to $1,211 an ounce from $809, according to the World Gold Council.
This rise in mining costs is a big reason why gold mining STOCKS are under pressure. But longer term, it’s bullish. That’s because a higher cost of production has two effects.
FIRST, it puts a floor under the price of gold. It’s hard for gold to fall under that total cost of production because marginal miners shut down at those levels.
Look, we saw gold production go up for the last four years in a row, right? Do you expect that to continue if gold falls close to — or below — miners’ cost of production?
SEDOND, the longer that gold stays near the total cost of production, the more that marginal projects are delayed or not started. That decreases supply in the longer-term, putting upward pressure on gold prices and re-inflating profit margins for the miners that were able to stay operational.
In other words, low gold prices bring bear market prices in otherwise good miners. Since low gold prices are self-correcting, we should use those opportunities to load up on cheap miners.
Reason for Optimism #3:
Gold Miners Are Cheap
Do you want to buy things when they’re expensive or when they’re on sale?
If your answer is “on sale,” then you’ll be pleased to know that gold miners are at their lowest level compared to gold since the 2008 financial crisis.
This is a chart of the Market Vectors Gold Miners ETF (GDX) divided by the SPDR Gold Trust (GLD).
The lower this ratio, the cheaper gold miners are compared to gold. They’ve NEVER been this cheap before.
Remember when the price of gold miners plunged in the 2008 financial crisis? And a lot of people rued the day they didn’t have the guts to buy those stocks at fire-sale prices?
Well, back up the truck and load up, buddy — the fire alarm is ringing right now!
Reason for Optimism #4:
Broad Bearish Sentiment is Itself a Bullish Indicator
The fact that holdings in gold Exchange-Traded Products (like the GLD) have dropped to the lowest level since August shows that investors have turned away from gold.
The bigger the fund, the worse the sentiment. Holdings in GLD itself are at the lowest level since July 2011.
Broad investor sentiment is usually called the “dumb money” because the mass herd of investors usually does the wrong thing at the wrong time.
It’s not a reflection of intelligence; it’s simple supply and demand, and applies at both tops and bottoms.
On the bottoms, if everybody is bearish, who’s left to sell?
Reason for Optimism #5:
Insiders are Buying
Enough about the “dumb money,” let’s talk about the “smart money” … and how you can follow the right group!
As of March 25, data from INK Research showed that there were seven precious metals stocks on the TSX in Canada that were experiencing insider buying for each one with insider selling.
According to the report published in Canada’s Globe and Mail, this ratio of insider buyers to sellers has nearly DOUBLED since mid-January.
Canada is home to many great mining companies; more so than in the U.S. Insiders are called the smart money because they know their companies best.
Right now, many mining executives think their stocks are dirt-cheap. There are many reasons for insiders to sell a stock, but only one to buy — they think it’s going up.
Reason for Optimism #6:
All This and Silver, Too
Silver has been punished even harder than gold. Wall Street hates it … hates it! But Mom-and-Pop investors love it.
The U.S. Mint recently reported that sales of U.S. Silver Eagle bullion coins topped 15 million coins by April 1. This is the first time — ever — that sales of Silver Eagles have hit the milestone so early in the year.
You wouldn’t know it from looking at a chart of silver, which is down near the lows it hit last year. Let’s look at how that chart shapes up …
You can see the similarities between May-August 2012 and February-April 2013.
I don’t like to put too much into the phrase “history doesn’t repeat but it rhymes.” But IF it does find support at last year’s lows, and IF this does follow the pattern, we might see approximately three or four more weeks of consolidation, then a breakout.
Bottom line: Gold could go either way right now. But there are plenty of forces lining up that could send it higher. If and when that happens, gold miners are dirt-cheap — at historic lows compared to the yellow metal — and silver is a screaming buy.
There are ways you can leverage gold’s next big move up. I’m exploring some stocks that are on the launch pad for my Junior Resource Millionaire subscribers. If you’re doing it on your own, do your own due diligence.
All the best,
P.S. The major factors affecting gold prices are aligning perfectly to set up gold for a huge rally. You can significantly magnify your potential gold gains — more quickly than just by holding bullion itself — with a select investment in this powerful sector.
In case you missed my private teleconference with Rick Rule, one of the nation’s premier precious metals investors, you won’t want to miss out on what he has to say about this explosive, and yet largely untapped, segment. I’ll be taking this recording offline soon, so click here to watch it right away!