Gold (GLD) and silver (SLV) have failed to challenge 2011 highs made late in April, hurt along with other assets by selling in May and big buyers "gone away" thus far in June trading. Global markets have not moved in unison, however. SLV sold off fiercely for the first four trading of May to close at $33.72 on the fifth. A month later, it sits at $35.34. GLD has risen from $143.47 to $150.22 over the same period, and currently trades less than 2% below all-time highs.
Meanwhile, emerging markets desperately needed to sustain worldwide growth have underperformed developed ones, led by the United States. Employment and housing reports here have been atrocious of late and QE2 is at its end. China's Shanghai Index (FXI) is down over 10% since mid-April and Brazil's BOVESPA (EWZ) is off 7% from an earlier 2011 peak. Markets are deeply interconnected and increasingly correlated with time, and the 800-pound red, white and blue gorilla in the room is simply rolling over slower than less established economies. The S&P 500 (SPY) has fallen by 5% since May began, with much damage coming the first week of June.
Gold's safe haven status has been confirmed with gains amidst June Gloom, while highly volatile silver has given back half of the more than 12% gain made in May. The bearish case for precious metals must depict gold and silver as simply the highest conviction of many bubbles, both peaking and rolling over later than other asset markets as deflationary forces take over and King Dollar ultimately reigns supreme.
Precious metals bulls point to thousands of years of high appreciation for gold and silver as stable, valuable forms of money. The last half-century of worldwide currency demonetization has been the greatest for population growth and steadily devalued gold and silver like never before in documented human history. Following the technology bubble of Y2K, the last decade has seen a slow and accelerated repatriation to precious metals, which account for approximately 1% of investor portfolios after bottoming out near 0.3%. Historically, with precious metals exchanged as currency and financial institutions not entrusted with savings, 20% or more of wealth has been stored as gold and silver. Dying King Dollar, therefore, is not the most established and fundamentally stable safe haven.
Indeed, precious metals markets, particularly silver, are currently loaded with speculators, though many were likely shaken out for good due to the plunge in early May. Predominant forces driving gold, however, are central banks and other large institutional buyers. As investors continue rushing to precious metals faster than miners can ramp up production, both gold and silver have a long way to go before they are valued appropriately. Downward moves are to be expected along the way, as profit takers periodically sell and deflationary forces continue to cripple cash flow systems, forcing investors to sell assets. With holdings still at extreme lows historically -- and developed economic systems failing left and right -- precious metals repatriation is set to continue with or without QE3.
A major pull back in gold and especially silver is not out of the question if significant fiscal tightening is implemented. Such would yield the buying opportunity of a lifetime for investors with dry powder. Either due to later determined monetary policy, the continued international progression towards saving in gold and silver, or central bank implementation of a precious metals-backed currency, the long term trend for PMs remains up. On the other hand, QE3 or otherwise extended loose policy will expedite epic runs in gold and silver.
Low cost gold miners currently offer the best value of any asset sector. Goldcorp (GG), Barrick (ABX), Newmont (NEM), Buevaventura (BVN), Gold Fields (GFI), Yamana (AUY) and other highly profitable gold miners currently trade at lower earnings ratios than most stocks. All have strong profit and dividend growth histories. Goldcorp has the lowest extraction costs, while Barrick and Yamana offer diversification across a greater number of assets.
Promising junior producers and exploration companies such as Richmont (RIC), Rubicon (RBY), Northgate (NXG), Northern Dynasty (NAK), Alexco (AXU), Entree Gold (EGI) and Aurizon (AZK) are priced far more attractively than they have been for months, falling along with overall stock markets. With gold prices strong and crude oil, a major input cost for miners, down over 10% since early May, miners are positioned better than ever. Richmont leads the group in immediate earnings potential, while Rubicon owns extensive Ontario property prospected to yield similarly to Goldcorp's leading project as well as other North American claims. Entree offers the cheapest per ounce of gold in the ground.
Major (GDX) and junior (GDXJ) gold mining ETFs are also on sale and offer diversified exposure to the must-own sector. Profitable silver miners, including Silvermetals (SVM), Minera Andes (MNEAF.OB), Silver Standard Resources (SSRI) and First Majestic Silver (FR), have unsurprisingly pulled back harder than gold stocks and offer great potential upside in a resumed PM rally. With lower earnings ratios, less volatile assets, wider profit margins and steady dividends, gold mining stocks deserve greater attention from long term investors.The metals themselves, as always, remain attractive due to scarcity and lack of counterparty risk.
Disclosure: I am long SLV.
Additional disclosure: May initiate long position in RBY, EGI, GG, GDX