October 2, 2022

Selling Climax in Gold and Silver Stocks Is a Classic Buy Signal

chartThe bear case for gold and silver stocks is well known and investors have reacted by dumping mining stocks indiscriminately.  The staggering decline in gold and silver stocks over the past two years now exceeds the decline that occurred during the crash of 2008 when the financial system was at the brink of collapse.

The Philadelphia Gold and Silver Index (XAU) is an index comprised of sixteen major precious metal mining companies. During the crash of 2008 the XAU declined by 58.5%.  From the peak of 226.58 in December 2010 to the low of 90.15 in June 2013, the XAU has collapsed by 60.2%.

Courtesy Yahoo Finance

Courtesy Yahoo Finance

Has the sell off of the past two years been so extreme as to constitute a selling climax which usually signals a major reversal from the lows?  According to John J. Murphy, an acknowledged technical analyst, a selling climax is “usually a dramatic turnaround at the bottom of a down move where all the discouraged longs have finally been forced out of the market on heavy volume.  The subsequent absence of selling pressure creates a vacuum over the market, which prices quickly rally to fill.”

It is too early to tell if prices have reached a capitulation bottom but investors who haven’t sold out positions in the precious metal miners after a 60% decline are probably thinking more about buying than selling.  Another factor that impedes future selling is the fact that investors are now getting paid to wait for a turnaround in the mining industry.

Historically, precious metal miners have never paid out large dividends but this metric has changed.  The stock price declines in  senior gold and silver producers have been so severe that the dividend yields on some gold mutual funds now approaches 4%.

The $2.4  billion Vanguard Precious Metals and Mining fund (VGPMX) currently yields 3.76% and holds a well diversified portfolio of seasoned mining companies.  The Vanguard fund holds investments in both domestic and foreign companies involved in activities related to gold, silver, platinum, diamonds, and rare minerals.

The chart on VGPMX looks like a reason for precious metal investors to commit suicide but if a selling climax has occurred, the losses of the past two years may be quickly recouped.  In addition, the chart of the Vanguard fund has made a triple bottom over the past six months.

VGPMX

Courtesy: Yahoo Finance

Another classic sign of a bottom in precious metal stocks was discussed by Mebane Faber who has drawn an analogy to the bottom of stock prices in early 2009 to the current chart of the Market Vectors Gold Miners (GDX).  In 2009 the S&P 500 kept hitting new lows even as the RSI and the MACD were making higher lows which is a classic bull signal.  A similar situation exists today with the GDX.

Courtesy: mebanefaber.com

Courtesy: mebanefaber.com

 

 

Have Gold Stocks Hit Bottom Yet? Richmont Mines Latest Disappointment

The price of gold is almost exactly unchanged on the year.  The first trading day of the year saw gold close at $1598 per ounce.  After reaching a high of $1781 on February 28th, gold has drifted lower and at today’s closing price of $1604 gold is up a fraction of a percent on the year.

 

The story has been quite different for stockholders in gold mining companies.   Gold stocks have gone through a brutal sell off during 2012 despite the neutral price action of gold bullion.  Stock prices of the junior gold miners have been particularly brutalized as shown by the Market Vectors Junior Gold Mine ETF (GDXJ) which is down over 50% from its high late last year.

 

GDXJ - Courtesy stockcharts.com

The shares of the largest gold miners have also seen major losses during 2012.  The PHLX Gold and Silver Index (^XAU), comprised of 16 major gold and silver producers, has decline by 21% from its peak reached in early February.

 

XAU - courtesy stockcharts.com

The latest casualty in the junior gold mining sector was Richmond Mines (RIC) which recently lowered its estimate of reserves and production and took a major write down on assets.  Richmond, a highly regarded gold mining company with excellent reserves and earnings prospects, was only one of the latest blowups in the junior gold mining sector.  Richmond Mines has collapsed 70% from its $13 per share price in late January, closing today at $3.97.

 

Courtesy stockcharts.com

Is the decline in gold mining shares a harbinger for the future trend in gold bullion or is the latest sell off a major buying opportunity?

Here are some thoughts from two of the brightest minds in the industry who both have superb long term track records.

Legendary gold investor John Hathaway of the Tocqueville Gold Fund (TGLDX) remains bullish as discussed in his latest Gold Strategy Investment Letter.

Why would anyone own them other than for the possibility of a higher gold price?  While we do not wish to minimize such issues as capital spending cost pressures, resource nationalism, or competition from GLD and similar instruments, we believe those concerns will fall by the wayside with the resumption of the bull market in the metal.  If gold were to trade at $2,000/oz. later this year, and should the ratio of gold mining shares (XAU basis) return to the mid -point of its range since the launch of GLD in 2004, or roughly 15% versus the current level roughly 10%, mining stocks could  double on a 25% increase in the gold price.

The policy challenges facing the Volcker Fed and the Reagan administration that ultimately capped the previous bull market in gold seem mild by comparison to those of today.  We believe that gold remains under owned and misunderstood notwithstanding a thirteen year bull market.  It is considered a fringe strategy to most, a little bit exotic and slightly risqué to the mainstream investor.  While policy makers attempt to buy time by inventing solutions that are incomprehensible to most, the dream of mainstream investors for robust growth amidst stable economic conditions remains alive.  Faith in half-baked policy improvisations that are nothing more than repackaging bad debt in the envelope of sovereign credit, along with hope that ever increasing quantities of sovereign debt will generate growth is, in our opinion, delusional.

Peter Grandich gives an excellent in-depth analysis on both gold stocks and gold bullion in a recent post on the Grandich Letter website.  The full post is a must read – here are some of his latest thoughts.

Despite general metals prices much, much higher than a decade or two ago, the mining and exploration industry is far more challenged now than ever before. This is especially true as you move further down the food chain in the junior resource sector.

I’m certain there are other reasons, but I believe the above is a good part of why we’re where we are today. The question now is does this mean the mining and exploration stocks are no longer worthy?

The “mother” of all bull markets continues thanks to four key reasons:

  • Once dominant sellers that capped any advances, Central Banks are now net buyers.
  • Gold producers, who once “cut their noses to spite their faces” by selling forward large quantities of future production and helped capped the price by doing so, now operate under the belief hedging is a “four-letter” word among investors.
  • Gold Exchange Traded Funds (ETFs) greatly changed the balance between supply and demand. Investors who never or rarely sought exposure to gold beforehand (because of difficulties associated with physical bullion buying) and/or who ended using mining shares for exposure only to see them not come close to correlating movements in the gold price themselves, embraced ETFs in a big and powerful way in order to have exposure to gold. Whether or not those ETFs are really direct ways to physical ownership doesn’t concern them, but their large-scale appetite for them combined with the changes among Central Banks and gold producers greatly altered the supply versus demand in favor of demand.
  • Gold is money. There’s no Central Bank printing it like it’s going out of style. There’s no government(s) borrowed up to their eyeballs in it. Where you find real growing wealth in the world you find those people acquiring it are using gold as a storer of their wealth.

Gold Stocks Remain Frozen In Time

Investors in gold mining stocks have had a tough five years.  Since 2008, the price of most gold stocks have remained frozen in time even as gold bullion has doubled in price.  Is the disparity in price performance between gold stocks and gold bullion a bullish set up or another false dawn for gold stock investors?

Gold - courtesy kitco.com

The PHLX Gold and Silver Index (XAU), which is comprised of 16 major gold and silver producers, is no higher than it was during the last quarter of 2007.   The large cap gold stocks represented by the Market Vectors Gold Miners ETF (GDX) have shared the same fate with no gain for the past five years.

GDX - courtesy yahoo.com

Beginning in 2011, the divergence between the price of gold bullion and gold stocks has widened even further.  Comparing the SPDR Gold Trust (GLD) to the PHLX Gold and Silver Index, we see that gold has dramatically outperformed gold stocks by a factor of five since early 2007.

XAU vs GLD - courtesy bigcharts.com

At this point, gold stocks are incredibly oversold and, in addition, represent sound fundamental value based on the price of gold bullion.  Given the notorious volatility of gold stocks, a move by gold above its high of last year could be the spark that ignites a huge rally in the gold stocks.

John Hathaway of the Tocqueville Gold Fund (TGLDX), who has produced fabulous investment returns over the past decade, had this to say in his latest Investment Update.

Gold and gold stocks appear to be bottoming in the wake of a four month correction which began in mid -August when the metal peaked at $1900/oz. Bearish sentiment is at extremes not seen in many years. This and a number of other indicators, such as stocks that have been hit by negative sentiment, the downtrend in gold prices since August, and tax loss selling, support our view that a rally lies ahead. This very bullish market set-up, in our opinion, mirrors the extraordinary investment opportunity of the despondent year end in 2007. Even though gold prices have been declining for several months, they finished the year with substantial gains. This suggests that the value represented by gold mining equities held in our portfolio could be extraordinary.

Disarray in Europe is, in our opinion, a slow motion version of the global market meltdown in 2007. It appears to us that the U.S. Fed is once again acting as the lender of last resort to European central banks in their efforts to save the euro. As in 2007, U.S. sovereign credit will be substituted for failing credits, in this case, peripheral European states. The fig leaf to justify such action on the Fed’s part is sado-fiscalism, or extreme austerity packages administered by technocrats. Tough restraints on profligate public spending, which has become a way of life in all Western democracies, will not go down easily. These measures are deflationary and will be ultimately met by howls of protests from mobs demanding renewed money printing and deficit spending. In our opinion, the fundamentals for gold are stronger than ever because the outlook for paper currencies is dire. The difficult correction of the last four months has shaken out all but the strongest holders, a perfect set-up for advances to new all-time highs in 2012.

Over the past ten years the Tocqueville Gold Fund has had an average annual return of 24%, far exceeding the 3% return by the S&P500.   The top ten holdings and percent of total assets of the Tocqueville Fund are listed below.

TGLDX Holdings

Lowering Gold Stock Portfolio Risk Through Diversification

There are numerous investment strategies available to capitalize on the gold bull market.  Gold investors have the option of investing in gold bullion, gold coins, gold ETFs, gold mutual funds and individual gold mining stocks.

Although many gold investors prefer to exclusively hold physical gold, diversifying into selected gold stocks can dramatically increase total returns.  Although gold stocks as a group have recently underperformed bullion, selected gold stocks have outperformed gold bullion.

Well managed gold mining companies with large ore reserves and increasing mine production have provided investment returns far in excess of the gain in gold bullion as seen below with the examples of Randgold Resources (GOLD) and Gold Resource Corp (GORO).  Both of these gold mining companies have vastly outperformed gold bullion when compared to the SPDR Gold Trust (GLD) which tracks the price of gold bullion.

GORO, GOLD vs GLD - Courtesy yahoo.com

Selecting the gold stock that will outperform bullion is difficult, however, as seen by the lagging performance of the PHLX Gold/Silver Sector (XAU) when compared to the GLD.  The XAU Gold/Silver Sector is a broad based index of sixteen large precious metal mining companies.  The GLD has outperformed the XAU by three times since 2009.

GLD vs XAU - courtesy yahoo.com

 

As with any stock portfolio, diversification is required into order to avoid the risk of under performance.  An example of the risk of holding a gold portfolio with only a small number of stocks was seen today when the price of Nevsun Resources (NSU) collapsed by almost 31% after the company unexpectedly announced that gold production will plunge by nearly half in 2012 due to a reduction in estimated gold reserves.

Since selecting individual gold stocks can be a daunting task for investors, a better alternative would be to invest in an actively managed gold stock mutual fund with a proven record of superior investment returns.  Past performance has shown that an actively managed gold stock mutual fund has outperformed passively managed gold index funds.

One gold fund that should top the list for investors to consider is the Tocqueville Gold Fund (TGLDX), run by legendary gold investor John Hathaway.  The Tocqueville Gold Fund has a remarkable average annual return over the past ten years of 23.3%, almost double the gain in the Philadelphia Gold/Silver Index.

courtesy yahoo.com

Although gold bullion has outperformed gold stocks since 2008, Mr. Hathaway’s outlook for gold remains extremely bullish and he expects that as gold continues to increase in price, gold stocks should once again outperform the returns of gold bullion.  In his latest Investment Update, here is what Mr. Hathaway had to say.

Gold and gold stocks appear to be bottoming in the wake of a four month correction which began in mid -August when the metal peaked at $1900/oz. Bearish sentiment is at extremes not seen in many years. This and a number of other indicators, such as stocks that have been hit by negative sentiment, the downtrend in gold prices since August, and tax loss selling, support our view that a rally lies ahead. This very bullish market set-up, in our opinion, mirrors the extraordinary investment opportunity of the despondent year end in 2007. Even though gold prices have been declining for several months, they finished the year with substantial gains. This suggests that the value represented by gold mining equities held in our portfolio could be extraordinary.

Disarray in Europe is, in our opinion, a slow motion version of the global market meltdown in 2007. It appears to us that the U.S. Fed is once again acting as the lender of last resort to European central banks in their efforts to save the euro. As in 2007, U.S. sovereign credit will be substituted for failing credits, in this case, peripheral European states. The fig leaf to justify such action on the Fed’s part is sado-fiscalism, or extreme austerity packages administered by technocrats. Tough restraints on profligate public spending, which has become a way of life in all Western democracies, will not go down easily. These measures are deflationary and will be ultimately met by howls of protests from mobs demanding renewed money printing and deficit spending. In our opinion, the fundamentals for gold are stronger than ever because the outlook for paper currencies is dire. The difficult correction of the last four months has shaken out all but the strongest holders, a perfect set-up for advances to new all-time highs in 2012.

Chinese Seek To Buy Undervalued Gold Mining Company

China has been steadily adding to its gold reserves as it attempts to diversify its huge holdings of foreign currency.  From only 395 tonnes in 1988, the Chinese central bank has increased its gold reserves to 1,054 tonnes.  As the largest foreign holder of U.S. Treasury debt, the Chinese have complained loudly about America’s addiction to debt and the nonstop efforts of the Federal Reserve to debase the U.S. dollar.

Besides buying ever increasing amounts of gold bullion, the Chinese have now decided to add gold mining companies to their shopping list.  Given the incredible disconnect between the market value of gold mining companies compared to the value of gold bullion, the decision to buy gold mining companies should come as no surprise.   Many gold mining stocks are selling at a substantial discount to their net asset values of proven gold reserves.

As reported by Bloomberg, China’s second largest gold producer, Shandong Gold Group Co, Hunts for Brazilian Gold Acquisition.

Jaguar Mining Inc. (JAG), which is exploring its options after receiving acquisition proposals, is proving that even a record takeover premium for a gold company can be a bargain.

Shandong Gold Group Co., owner of China’s second-largest gold producer, offered to buy Jaguar for $785 million in cash, two people familiar with the deal said Nov. 16. The $9.30-a- share bid is 77 percent more than Jaguar’s prior 20-day average, the highest premium in a cash takeover of a gold miner greater than $500 million, according to data compiled by Bloomberg. Jaguar is still trading at a 3.5 percent discount to its net asset value, cheaper than 94 percent of comparable gold miners.

“Relative to their peers, Jaguar is trading at a pretty substantial discount,” Sachin Shah, a Jersey City, New Jersey- based special situations and merger arbitrage strategist at Tullett Prebon Plc, said in a telephone interview. “Even a $9.30 offer may be undervaluing the company. They could actually get a longer-term value asset at a cheap price. It’s the Brazilian assets that make Jaguar so appealing.”

After closing at $7.80 in New York on Nov. 16, Jaguar fell 3.5 percent yesterday to $7.53. The company is trading at 0.97 times its net asset value of $7.80 a share, based on the average of analysts’ estimates compiled by Bloomberg. That means it’s still cheaper than 16 of 17 other gold companies with similarly sized mines, the data show. Jaguar’s rivals are worth an average of 1.8 times the value of their underlying assets.

“The stock has lagged the group and generally underperformed, and as a result the company was ripe for the picking,” Mark Kellstrom, a senior partner at Summit, New Jersey-based Strategic Energy Research and Capital LLC, which focuses on energy and natural resources, said in a phone interview. “For a purchaser like Shandong, there’s a real opportunity here to buy gold reserves at cheaper valuations, improve the operating results and therefore reap a nice return.”

It was simply a matter of time before cheap gold mining companies became acquisition targets.  Gold mining companies have lagged far behind the gains of gold bullion and are selling at huge discounts to the value of their gold reserves.  A look at the comparative performance of the SPDR Gold Trust (GLD) to the PHLX Gold/Silver Index (XAU) shows that since 2008, gold has returned approximately 200% compared to a return of only 50% for the XAU.

The fundamental appeal of gold mining stocks is further bolstered by increasing demand for gold bullion.  The Gold Demand Trends released by the World Gold Council shows that global demand for gold increased by 6% in the third quarter.

 

Courtesy yahoo finance

Despite the recent volatility in gold prices, the long term fundamental case for gold remains intact and, in fact, grows stronger by the day as one sovereign nation after another stares into the abyss of debt default.  The move by the Chinese to acquire Jaguar Mining could be the spark that sets off a stampede to acquire undervalued gold mining companies.

Gold Stocks Vastly Outperform Gold On The Week – Will The Trend Continue?

For the week ending October 14, gold continued to rally, gaining $26 on the week to $1,678.00 as measured by the closing London PM Fix Price.

Gold stocks, by comparison,  dramatically outperformed the gain in bullion by almost fourfold.  In order to get a broad based assessment of relative performance, gold was compared to the XAU, GDXJ and TGLDX.

The XAU or Philadelphia Gold/Silver Sector is a broad based index of sixteen large precious metal mining companies, the GDXJ or Market Vectors Junior Gold Miners tracks small and medium cap gold and silver miners and the TGLDX  or Tocqueville Gold Fund is a diversified gold stock fund with one of the best track records in the industry.

A summary of gold compared to the XAU, GDXJ and TGLDX for the one week period ending October 14th is shown below.

WEEK ENDING OCT 14, 2011
% GAIN OR (LOSS)
GOLD 1.57%
XAU 5.51%
GDXJ 6.85%
TGLDX 5.68%

One week does not ensure that a trend will continue but the gold stocks have long been under priced in relationship to gold bullion. Eventually, this pricing disparity will converge. Throughout 2011, gold stocks underperformed gold as can be seen by comparing the performance of gold to the XAU.

 

XAU VS GOLD - courtesy stockcharts.com

The Tocqueville Gold Fund (TGLDX), run by legendary gold investor John Hathaway, has vastly outperformed the S&P, the XAU and gold bullion over the past decade with an average annual return of over 26%.  This is what John Hathaway had to say about the long term performance of gold stocks in his first half investment update for the Gold Fund.

During the 1st half of 2011, gold shares lagged the gold price. Bullion rose 5.56% while the XAU benchmark declined 10.57%. The Tocqueville Gold Fund declined 5.53%. This apparent disconnect is not unprecedented. For example, during the credit crisis of 2008, the XAU declined 28.54% while the price of gold rose 5.77%. Even though the gold price is the single most important fundamental determining value for gold mining shares, they often do not move in lockstep and the first half of 2011 is one such example. In 2010, gold shares performed particularly well and the XAU rose 34.67% while the metal rose 29.52%. In our opinion, the relative underperformance of gold shares during the first six months of this year represented a healthy and necessary consolidation. The Tocqueville Gold Fund owns physical bullion but is much more heavily weighted to gold mining stocks, as has been the case over the past ten years.
We believe that there is significant performance catch up potential ahead for gold mining shares relative to bullion. Earnings reports for the quarter just completed should be exceptionally strong for all producers and in most cases surpass all- time records. We expect such results to be accompanied by numerous announcements of dividend hikes. Should gold prices maintain or exceed the $1500 level, skeptical investors will become more willing to normalize the earnings power that is soon to be demonstrated.
The factors that drive liquid assets into gold bullion continue to flourish. Most important, negative real interest rates open the floodgates for capital to seek out the safety of gold. In addition, the never ending sagas of the Eurozone debt woes and the US debt ceiling remind investors that sovereign debt of nearly all Western democracies are not the safe havens they were once regarded. Nevertheless, while we expect bullion prices to set new highs during the second half, we believe gold mining shares will provide returns superior to the metal.

The latest report on the top ten holdings of the Tocqueville Gold Fund are shown below.

 

 

Gold Mining Stocks Break Out To New Highs; 3 Gold Stocks That Should Double

The divergence between the performance of gold bullion and gold stocks seems to be coming to an end.  Both the Market Vectors Gold Miners ETF (GDX) and the Gold Bugs Index ($HUI) have broken out to new highs as investors move into undervalued gold mining shares.

 

During the initial stages of the gold bull market,gold stocks significantly outperformed gold bullion.  From October of 2000 to June of 2008 gold stocks, as measured by the PHLX Gold/Silver Index (XAU), rose 345% compared to a gain of 252% for gold bullion.

Since 2008 gold stocks have significantly underperformed bullion as gold prices increased by over $1,000 per ounce.    As a result, many gold stocks are selling at bargain prices based on increased earnings and the value of proven gold reserves.

Investors have a wide variety of options for investing in gold mining shares including ETFs and gold stock mutual funds.  One of the best performing gold funds is the Tocqueville Gold Fund (TGLDX) run by John Hathaway.  TGLDX has achieved an average annual return of 26% over the past 10 years.   An investment of $10,000 in the Tocqueville Gold Fund made in June 2001 was worth $102,929 as of June 2011.

For investors who prefer to invest in individual gold mining shares, here’s a short list of three gold mining stocks that could easily double in price.

Newmont Mining (NEM) is a large cap gold mining company with proven and probable gold reserves of 93.5 million ounces.  NEM has a strong balance sheet, is forecasting an increase in gold production of 35% over the next six years and pays a cash dividend of 50 cents per share (see A Large Cap Gold Stock That Could Double in Price). NEM hit a new all time high today.

Kinross Gold (KGC) is selling at a large discount to the value of its gold reserves.  One value investor is forecasting a price target of $27 per share (see How Patient Investors Can Buy Gold At $250 Per Ounce).  KGC closed Thursday at $18.18, up $0.40.

Richmont Mines (RIC) is a junior gold producer.  Earnings for the second quarter of 2011 increased from $0.01 per share to $0.16 per share compared to the prior year.  RIC hit a new high of $12.03 at yesterday’s close.