We May Have Just Found The Bottom In Gold Stocks

Includes: CJES, HL, MUX, RBYCF
by: Paul Nathan

In my book, The New Gold Standard, I suggest that the best way to get back to a gold standard is forward, through the use of new technologies. I also submit that the move back to gold will evolve naturally through the market process, as more and more individuals, institutions and governments demand it.

But Missouri isn't waiting for the market to pronounce gold the winner. Representative Paul Curtman (R-Pacific) says the new bill he's sponsoring "…allows you to liquidate gold and spend it in real-time. We're not monetizing gold and silver in the sense that you're going to walk into stores and use gold and silver, but if you have gold and silver and you put it in a depository, for lack of a better word, they might in exchange give you a debit card. So, you can go out and use your debit card and as you spend it the depository will sell off your gold and silver for you to cover the cost of the transaction."

Curtman says the plan only deals with U.S. minted gold and silver coins and Missourians can already back purchases with precious metals, but his bill would simplify the process. "Right now you have to go through the process of going to a coin shop or going to a pawn shop, selling it all off and then going out and spending it. Doing it this way makes it much more convenient."

This is an idea whose time has come. Unless prevented by the federal government, states will revert to a "new gold standard" allowing consumers to protect the value of their money. Many more states are initiating similar bills. Meanwhile, gold is being formally mobilized among central bankers around the world as collateral for new loans putting gold back front and center as a reserve asset.

In A Plan To Save Europe, I wrote that, "It is time gold returns to its age old function as collateral. We have not seen such a move by Central Bankers or the private banking sector in many, many years but, the way things are going, we may be about to." Professor Lew Spellman of the McCombs School of Business at the University of Texas at Austin seems to agree.

"The great corollary of over indebtedness is the relative scarcity of good collateral to support the debt load outstanding. This imbalance of debt to collateral is impacting the ability of banks to make loans to their customers, for central banks to make loans to commercial banks, and for shadow banks to be funded by the overnight Repo market. Hence the growth of gold as a collateral asset to debt heavy markets is inevitably in the cards and is de facto occurring. Gold is stepping up to the plate as "good" collateral in a world of bad collateral."

And the momentum for gold will only continue to build as it is increasingly demanded by individuals as money, and by financial institutions and central banks who want gold as collateral reserves and for general diversity and protection. I'm not one to make predictions about the price of gold going to the moon, but as a gold and resource stocks specialists, I do believe the demand for gold will grow in the future just as it will for food and energy.

But what about the debate over whether we have entered a new bear market in gold or whether this is simply a consolidation? I think gold has answered that question. Gold has not broken down, despite many reasons for it to do so. Gold has stubbornly held above support levels even though many gold stocks have fallen to 52 week lows. Either gold is wrong or gold stocks are wrong. I trust the gold market. That is why last week I covered my reverse ETFs on the stock market in general, gold and silver, and went "all in" long on selected resource stocks. After a vicious sell off in many resource stocks, I think we may have just seen the bottom. Take stocks like McEwen Mining (NYSE:MUX) and Rubicon Minerals (RBY) which are down 60%, or Aurizon Mines (AZK) and C&J Energy Services (NYSE:CJES) which have stellar fundamentals and have been brutalized as well.

The coming weeks are pivotal. Either it becomes clear that there is a strong enough underlying demand for gold, or we will break to new lows. If we do hit new lows, look for a major sell off and know that I will be aggressively short once again. But if we continue to consolidate and move a little higher from here, then I see where resource stocks are now as a rare buying opportunity that will quickly become obvious to investors as the money on the sidelines finds its way into the market and these battered down bargains.

My money is on the latter.

Disclosure: I am long MUX, RBY, AZK, CJES.