They don't ring bells at the top or bottom, but this smells like one. The fundamentals for gold (NYSEARCA:GLD) are only getting stronger by the month, and our opinion is that the Gold Mining sector (NYSEARCA:GDX) has been so beat up that it has just about no choice but to have a strong counter-trend rally that may have already began.
We have been Gold Bulls since late 2001 when gold traded near $300 per ounce and Investors as a rule had little to no exposure to the sector. Who could blame them really? Gold had been an ancient investment relic for almost two decades at the time. Interest rates were higher then, Inflation was under control, and there were no global currency wars to boot. As we all know in hindsight, that has all changed.
Gold has risen in value for 11 years running since 2001 and that we had a parabolic rise in gold that culminated in a Time Magazine cover feature, a minute by minute ticker watch on CNBC, and calls for $3000 gold. It all ended back in August of 2011 and since that time we have had a frustrating 18 month plus period of gold consolidation, with fits and starts.
With that all said, we think this period is a normal correction pattern where-in the Gold Bull serves to buck everyone off at every opportunity. After all, that is what the a bull does in any bull market, keeps the least amount of participants on it's back as possible. During this period of consolidation, the fundamentals for the precious metals have been getting stronger in our opinion.
This leads us to a new leg up for gold to complete an amazing run since 2000-2001. Often in the commodity sector the final rally stages are the strongest of all and will usually end with a parabolic move, which we are a long ways from just yet. In the midst of all of this volatility, one thing has remained constant, and that is the decline of the Gold Mining and Exploration sector stocks.
Now what could spur this next move to the upside in the valuations given to gold stocks in general?
Negative Real Interest Rates: The fundamentals for gold in our opinion are getting stronger and not weaker. To wit, negative real interest rates are getting worse. Recently looking at my brokerage statement I saw that I was earning .04% interest on my money market account. If you figure that inflation is running at 4-5% easily (just look at the Food Stocks for an inflation indicator), then the real interest rate on savings is about negative 4-5% right now.
Typically, negative real interest rates are a boon for gold, but it may just be that we needed a period of consolidation as gold had priced in some of this over a year ago. That being said, interest rates have in fact continued to decline since the last gold peak and thereby only increasing the intrinsic value of gold as an investment holding.
The race to debase: Currency wars have broken out everywhere, as clearly evidenced by the dramatic fall in the Japanese yen, which interestingly has spurred their stock market higher as well. We also will note that debasing one's currency is an attempt to bolster the export of goods and services for the country whose currency is declining, thereby leading to more profits, higher GDP, and the illusion of a wealth effect.
Inflation: The bogeyman is in the room, believe me. Have you noticed the size of cereal boxes shrinking whilst the prices remain the same or higher? How about the latest box of Wheat Thins? It looks like a dollhouse size for your kids playtime. Food stocks are on the rise, just look at the PBJ ETF (NYSEARCA:PBJ) and you can see what is underfoot for inflation. Gold tends to be a great hedge when hyper-inflation takes hold.
Companies that are well known like Royal Gold (NASDAQ:RGLD), Goldcorp (NYSE:GG), Newmont Mining (NYSE:NEM) and quite a few smaller names as well are likely to rally in the coming months. There are exploration stocks trading for $12 per ounce of gold in the ground in their reserves base. Others, like Osisko Mining (OTCPK:OSKFF) are trading at low valuations to cash flow with high insider buying a constant right now as well.
Take a look at the Gold Stock ETF below: This shows gold stocks peaking just as gold peaked in August 2011 and we think possibly bottoming here this month as gold re-tests the 2012 lows.
If our analysis is correct, then we think now is the time to start accumulating the gold stocks or ETFs as the precious metal approaches lows and sentiment is about as negative as it can get. The fundamentals for the precious metals are getting better by the month, not worse, but investors have largely run out of this trade. We think it's time to run back into the trade, because there will be no bell at the bottom, will there?