Is This the Death of Gold & Silver Stocks?

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Includes: ABX, AEM, AUY, GDX, GG, IAG, KGC, NEM, PAAS, WPM
by: Marc Courtenay

In a way it seems like a long time ago. It was the summer of 1982 and the latest issue of BusinessWeek magazine arrived in my mail box.  There on the cover was the lead story, complete with some scary illustrations. In bold, big words the title read, "The Death of the Stock Market".

I don't remember which writer penned that story, but at the time it made some sense to me and millions of readers. Ronald Reagan had been in office over a year at that point, the economy was dismal and the stock market had been in a bearish mode for 16 years.

That's right, 16 years of mostly down or sideways movement. There were very little signs that this was about to change in a big and unbelievable way.

As I look back now I realize that headline was perhaps the beginning of the most ebullient, exuberant and long-lasting stock market bull market that the United States has ever seen.

From 1982 through the year 2000 the Dow Jones Industrial Average soared from around 750 to over 11,000.

The numbers for the Nasdaq and the S&P 500 were equally as impressive. It all started with a very pessimistic mood and a shocking headline.

Right now the same mood seems to be pervasive when it comes to gold and silver mining stocks. Every week I read some fundamental or technical analysis telling us that the entire sector is in a funk and will stay there for quite awhile.

After all, look at how far the big company stocks have plunged just this year alone. The 1-year chart below of The Market Vectors Gold ETF (NYSEARCA:GDX) illustrates this graphically thanks to Yahoo! Finance.

Chart for Market Vectors Gold Miners ETF (<a href='https://seekingalpha.com/symbol/GDX' title='VanEck Vectors Gold Miners ETF'>GDX</a>)


GDX seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. It recently broke below the 52-week low that had been in place since last August.

Gold companies like Barrick (NYSE:ABX) and Yamana (NYSE:AUY) recently either hit new 52-week lows or matched the ones in place. Goldcorp (NYSE:GG) and Kinross Gold (NYSE:KGC), while not breaking down to their annual lows were hammered hard as well.

For those of us who have believed in the potential for silver the story has also been frightful. Look at the 1-year chart below for Silver Wheaton (SLW) which in my book is the bellwether for the silver sector.

Chart for Silver Wheaton Corp. (SLW)

If a picture paints a thousand words, then this chart tells quite a story.

Although SLW and the other gold and silver stocks have rebounded a bit since their recent lows, some analysts have called this a "dead cat bounce"...a term I despise because I love cats.

Now some of you might be wondering why I'd write such a dire story with such a horrible title.

I'll let you in on a secret. I'm hoping my headline will be the beginning of the next big leg upward in this amazing bull market in gold and silver stocks that began around 2001 and is overdue for a bit of a rest.

That legendary stock market bull run from 1982 through 2000 lasted for eighteen amazing years. The gold and silver bull has only been "running" for around seven years.

The classic ending of a bull market is when everyone and their lawn maintenance people think it will last forever and shoe-shine boys are giving hot stock tips (remember the dot-coms and the "new economy" mania at the end of the 90's?).

When it comes to gold and silver mining/producing companies, and I mean the big names mentioned above as well as companies like Newmont Mining (NYSE:NEM), Pan American Silver (NASDAQ:PAAS) and Agnico Eagle Mines (NYSE:AEM), the average American wouldn't know these companies if they bit them on the arse.

If you stopped the average shoe shine boy on the street and asked for a "hot tip" on a great gold producing company he'd look at you like you as if you were two sheets to the wind and just escaped from the state mental institution.

Yes, there are more investors interested in the gold and silver sectors than in 2001, but we have a heck of a long way to go before someone calls this a "bubble" and accuses those who invest in the precious metals stocks of being afflicted with "irrational exuberance".

In all candor I know there are some things that could keep the gold and silver stocks down and ugly.

One that comes to mind is that if Obama wins the presidency, some speculate he will not reappoint Fed Chairman Bernanke when his term comes up for renewal in 2010.

Then, Obama might appoint a Chairman like Paul Volker who will raise interest rates, support the US dollar, and harpoon the price of gold and silver like what happened in the 1980s. Is that possible? Yes! Is it likely? No!

For every reason you can give me that gold and silver prices will go down from these levels, I can give you four reasons why they will go up...or at least I think I can.

Our friends at Casey Research made the case for how analysts are making a strong distinction between the long term trend for gold and the day to day action.

"Gold remains hesitant and is not getting clear direction from the dollar which is essentially flat," wrote Mark O'Byrne, executive director at Gold and Silver Investments Ltd.

"Higher oil prices and weakness in equity markets should result in gold remaining well bid as this market session progresses, but given the degree of macroeconomic and geopolitical uncertainty anything can happen in these markets in the short term," O'Byrne said.

It will be interesting to see what happens as we move into the last quarter of the year, typically the highest of demand times for precious metals.

Julian Phillips, an analyst at GoldForecaster.com, said he believes that the dollar is having "less and less effect at the moment as we run out of time before the high season in gold begins."

Despite the recent price pullback, physical demand for gold has remained at very robust levels in the U.S., India, the Middle East and Asia. Most dealers cannot get their hands on sufficient quantity of product to satisfy their customers.

Demand for American eagles has been so far beyond what the U.S. Mint had projected that it was forced to suspend sales for a week. Now, strict rationing is in effect.

"The bottom line," O'Byrne says, "is that this lack of supply and huge demand will result in materially higher prices in the coming weeks." If that turns out to be true, it is hard to imagine that gold and silver stocks are "dead".

My worst-case-scenario is that they are suffering from temporary "depression" and that the market will soon realize that, give them all a dose of Omega-3 fish oil and they will be feeling and looking better sooner than later.

Someone pointed out to me yesterday that Goldcorp is currently selling at only 1.8 times its book value and that Kinross Gold is selling at a forward PE ratio of only 16.

Take a look at Canadian producer IAM Gold (NYSE:IAG). It's shares are selling at book value and the forward PE ratio is barely above 12. Do these companies sound overpriced and expensive to you? I would say not.

Yes, the gold and silver stocks could go down some more before they turn around. But 4 months from now this might go down on record as the last big bargain-basement sale of these profitable companies.

Even though the cost of production is up and precious metals prices have corrected sharply, I don't believe for a NY minute this is the death of these stocks.

If I'm wrong I will be terribly disappointed and will eat my hat...the golden brown one that is made of milk chocolate...just in case I have to eat it.

For those of us who own these stocks, let's hope I'm right!

Stock position: Long ABX, AUY, GG, KGC, SLW, PAAS, AEM, IAG.

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