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This piece was contributed by long time
Fundamental View reader and Union Securities Broker, Michael Ballanger. Enjoy
it because it has never made more sense.
The
world of professional money management used to be dominated by grey-haired,
bespectacled gnomes whose PHD’s were from the “UHK “
(University of Hard Knocks) and what qualified them to manage portfolios was,
quite simply, experience. There was no such thing as
a“quantitative model” or a “paired trade” or
ETF’s or derivatives to dilute the funnel effect of massive demand
against limited supply which was a characteristic of the 1970’s
moonshot enjoyed by holders of gold equities.
As
we approach the autumn of 2011, it is obvious to old warhorses like me that
it is NEVER “different this time” in that you cannot have the
30-year median P/E for gold stocks of 32 contract to 13 without a
“reversion to the mean” occurring some time in the not-too-distant
future. It is my belief that the shit-kicking we are seeing in the NASDAQ and
S&P is taking enormous money out of conventional equity funds and it is
these redemptions that are causing this gold equities aversion/revulsion.
An
enormous debate is raging as to the predictive behaviour of gold equities as
it relates to the bullion price. Over the years, it has been true that
“Gold Stocks lead Gold Bullion” but the lead time is
usually weeks, not months. This P/E contraction
for the Senior Producers has been going on for most of 2011 and it has had a
negative effect on the flow of funds into intermediates and juniors. Deal
flow is way down for the starving junior miners and yet there has never, EVER
been a time in history where a new discovery of gold or silver has had such
an enormous and immediate accretive effect. Pre-feasibility studies are now
screaming“Go, Go, Go!” for low-grade deposits that were
discovered fifty years ago and yet under-funded juniors sitting on new high-grade
discoveries are stuck in neutral (or reverse) because some
geek“quant” with peach-fuzz cheeks stares at a computer print-out
that executes a “correlation analysis” that says the juniors will
underperform due to “sigma failure” or “alpha deterioration”or
some other geek term that completely ignores common sense. When I graduated
from UHK, I was well-trained in common sense and have the scars to prove it.
The
TSX Venture Exchange has been the incubator for dozens of gold, silver,
copper, zinc and diamond discoveries over the past several decades and it is
trading at a little over HALF of the 2007 high of 3,300. The exchange that
seeded Barrick Gold, Voisey’s Bay, Eskay Creek
and was the sole genesis of an entire multi-billion dollar diamond industry in Canada is being
ignored, ridiculed, and shunned because some quant geek thinks it is
“unsuitable” for his fund that just took a 50% haircut on Bank of
America.
It
is my belief that the current bear market in global equities will become the “two-by-four to the head of the mule”
that finally forces the Geek Squad to take a crash course in common sense
(UHK Night School) and shift some of the trillions showered upon them by
Uncle Ben and direct it to the entire Precious Metals Sector. This will
result in a normalization of gold equity P/E’s and a massive upward
re-pricing of the TSX Venture Exchange. And THAT will be the manic bubble
that we all deserve.
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