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Why I’m a Gold Bull by Ben Kramer-Miller

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Published : May 27th, 2015
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Category : Gold and Silver

Overview

The past few years have been lousy for gold and related equities with few exceptions. Gold miners have been hit especially hard, as they’ve been impacted by more than just falling gold prices. Production costs have risen. Political risks have suspended several outstanding projects. Capital has been much more difficult to come by as investors expect the gold price to fall further. As a result, over the past five years while the gold price is roughly flat the Market Vectors Gold Miners ETF (NYSEARCA:GDX) has lost 58% of its value.

There are a lot of gold miners out there and not all of them have faced these problems. In fact some of them have improved their positions substantially in the past 5 years. Unfortunately, bear market selling is indiscriminate, and many of these companies’ stocks were overvalued in 2011. Investors who locate such opportunities will find that they are often very inexpensive due to this indiscriminate selling.

Assuming gold hasn’t bottomed we could very well see another round of heavy indiscriminate selling. But I think some gold stocks have bottomed and are in clear uptrends. Some of them are cheap companies that are rapidly growing their fundamental valuations through asset accumulation and optimization, asset divestiture, and with a little bit of luck: deposit discovery and expansion. These companies are poised to benefit tremendously from the next leg of gold’s secular bull market–an event that is all but inevitable, albeit impossible to time.

Before assessing gold miners and strategies for owning them it is important to know the reasons to be long of gold generally. I will get to mining companies in part 2.

Why Gold?

Gold has been in a relatively clear downtrend since 2011, although it is in a much longer uptrend and it trades at multiples of its 1999 bear market trough of $255/oz.

(Source: Strategicgold.com)

Money supply isn’t the only factor that impacts the gold price or the Dollar’s purchasing power (demand for money is the other factor) but over the long-term it is a very good indicator.

Conclusion

Will we see a bottom in 2015? I don’t know, but I think the risk/reward is heavily skewed towards gold bulls and against the bears. In order for gold to reflect the rise in the global money supply we’ve seen over the past several years it would have to rise substantially. I think we will see not just a mean reversion but an overshoot, so that market euphoria creates a situation in which gold is overvalued relative to the money supply, and since gold is cheaper than it has ever been relative to the monetary base the overshoot could be more substantial than it was in past gold bull markets.

How high is this? Consider that in the 1970’s bull market the value of the U. S. gold hoard peaked at 5X the monetary base, or nearly 20X the current ratio, meaning that if gold were to hit the same peak we could easily see $20,000/oz. gold or higher.

The downside would have to be considerable, and considerably likely, if this reward weren’t worth pursuing. Since gold is already inexpensive relative to the monetary base and to other data points (e.g. the cost of production) it is difficult to imagine any more downside fundamentally. Nevertheless the gold market is making lower highs and lower lows while risk-free interest rates (i.e. Treasuries) are still incredibly low, making many stocks and bonds attractive on a relative basis. This is a status quo I want to bet against longer term, but it is impossible to know concretely what will shift the market direction and when this will happen.

I don’t think we will see gold trade below its 1980 high and strong support level of ~$850/oz. I know it sounds like a long fall from $1,200/oz. but relative to the upside it is tremendous. Furthermore this is a worst-case scenario and a price we might only see for a few hours or days. The low might be $1,000/oz., or it might already be in.

This article first appeared at MiningWealth.com on May 26th, 2015.

 

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Jason Hamlin is the founder of Gold Stock Bull, a site providing investment strategies for profiting on the bull markets in Gold, Silver and Alternative Energy. Jason has a background in market research with ACNielsen, and has developed an expertise at analyzing data, charts and market trends for several Fortune 500 companies around the world. Jason has an in-depth knowledge of investing, has passed the Series 65 Uniform Investment Adviser Law Examination and has been tracking the secular bull market in precious metals since its inception.
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