We thought it useful to look back at previous serious gold stock drubbings to see just how the current rout compares.
Take a look at the chart below of the Barrons Gold Mining Index and you can see that the current rout (in black) has just about reached the depths seen in the 1974-76 downturn (blue line). It is worth pointing out that over the subsequent 4 years the index rose 700%.
With sentiment figures of the richter in terms of negativity, valuations at 20 year lows and the sector ripe for consolidation, our thoughts are that the upside on a 3-12 months view far outweighs any further dowside. That doesn’t mean there will not be further downside, but rather that patience when trying to find a bottom in a sector so unloved and offering so much value, is usually well rewarded. Should the gold price fall much further then you will begin to see mines mothballed and so a restriction in supply that will likely coincide with an increase in jewellery demand – particularly from the Indians and Chinese – of course this is precisely the sort of recipe that will act as a brake on further price slides and so set the scene for a rebound in the gold miners.
This morning we also had our investment meeting and an appraisal of the landscape that we see for the global economy, covering also China and the QE tapering issue. It strikes us that “Helicopter” Ben Bernanke has rather got himself stuck in a box as we have seen in recent days just how the equity markets have reacted to the “taper caper”. Just as there appeared to be a degree of self sustaining momentum in the US economy, it seems that with a housing market roadblock now in the form of higher mortgage rates and a deflation of the equity wealth bubble, that is is in danger of turning into a sharp slowdown. Of course, in the event of a slowdown then any thoughts of tapering disappear back into the ether…
It is important to remember also that the Fed’s current $3tn balance sheet that has been injected into the banking system to support the economy is highly unlikely to be actually sold back to the market from whence it came. The “tapering” issue is simply related to reinvestment of bond coupons that the Fed are receiving on their bond hoard. What that means is that the money that has been created will remain in the system. That is support for precious metals prices in the near – medium term too and something the market does not seem to be taking account of.
We also talked about China and its liquidity issues. With the SCI almost back to the lows of 3Q last year and PE’s back in single digits we are getting more enthused about building a position within our Macro fund here. We called this turn almost to the day last year (see here – http://www.spreadbetmagazine.com/blog/chinese-stock-put-option-sales-at-a-six-year-low.html) and believe that we are getting near again to a tradeble opportunity on the long side. Staged entries over the next 2-4 weeks are likely to be rewarded on a 6-12 months view.
Here’s a PDF of out top Gold Mining Picks