Gold closed at $1,716 per ounce last Friday, almost $80
below the peak of $1,791.75 it reached three weeks ago. The drop was widely attributed
to continuing global economic uncertainty and speculators taking profits – which means the experts have no idea what
really happened. We don't try to second-guess short-term fluctuations here at
Casey Research, but instead keep our focus on the bigger picture.
In the greater scheme of things, a 4.2% decline is not
a significant drop for gold; for a savvy investor, it's another chance to buy
bullion cheaper. We're not alone in thinking that way: Reuters reports that gold holdings of metal-backed exchange-traded funds grew over
this period. There are indications that Indians preparing for their
festival season pushed demand higher as well.
An even better buying opportunity can be found with the
gold equities. While gold was down 4.2% from October 4 to 26, gold stocks
fell by 5.3% at the same time.
The difference isn't all that big – so why do we
think it's important? First, the decrease would have been much greater if
we'd cheated a bit and used the numbers as of two days earlier, underscoring yet
again how volatile our market is. Second, the current decline in the sector
is likely to be short-lived due to the traditionally stronger fall and winter
season we're entering. Third, the inherent leverage gold stocks carry over
the price of the metal should deliver better-than-bullion returns when they
rebound – a fact big investment funds have been taking advantage of for
Gold's rise drove many mining stocks much higher in
August and September, but at present they are looking undervalued again. To
see why, let's examine their action over a longer time frame. In the chart
below you can see how gold stocks have performed since the beginning of the
year, as measured by the HUI (AMEX Gold Bugs Index).
The two highlighted areas are periods where the gold
price was about the same. In February and October, gold peaked at $1,781 and
$1,791, respectively, and then in both instances, declined to about $1,700.
While gold was trading at nearly the same level in both cases, stocks are
notably cheaper now than a year ago. Whether they are undervalued depends on
the merits of each company, but as a group, the least we can say is that they
are a better deal than they were a year ago.
Further, when resource stocks get cheaper in comparison
to the underlying commodity – gold in this case – they tend to
make up for the imbalance; their rebound is bigger. For example, if we look
at the pattern in this year's dips and recoveries, we see that gold stocks
lose more in percentage terms than gold but also outpace the metal
As we have long said: gold stocks offer leverage to
gold – in both directions.
Seasonality also matters: October has been historically
the weakest month of the year for gold equities, usually followed by a surge
in November. Combined, these factors signal that the current weakness is a
great buying opportunity.
If you're looking to buy the dips, this qualifies as
one. This is the case for both gold and gold stocks.
When gold rebounds, the stocks will log bigger
percentage gains. That's been a consistent pattern throughout the bull
market, so buying a tranche now will bring some attractive profits when the
market turns around.
Key point: be picky. It goes without saying that not all stocks will
perform equally. Some are poised to do better than others – and some a
It also happens to be election time in the US, and
people will be "pulling the lever" for their preferred candidates
soon. Our preference is for gold and gold stocks, and we're voting with our