Gold News

Gold for Prudence, Not Mining Stocks

If gold mining stocks offer leverage, they've got a lot still to do...
EVEN WITH last week's pullback, the precious metals market is off to an impressive start in 2014, writes Laurynas Vegys, research analyst at Doug Casey's flagship International Speculator newsletter.
Gold is up 10.6%, silver 4.3%, and the PHLX Gold/Silver (XAU) 17.1%. Gold, in particular, had a great February, rising above $1300 for the first time since November 7, 2013.
This has led to some very handsome gains in our Casey International Speculator portfolio, with a few of our recommendations already logging triple-digit gains from their recent bottoms.
One of Doug Casey's mantras is that one should buy gold for prudence, and gold stocks for profit. These are very different kinds of asset deployment.
In other words, don't think of gold as an investment, but as wealth protection. It's the only highly liquid financial asset that is not simultaneously someone else's obligation; it's value you can liquidate and use to secure your needs. Possessing it is prudent.
Gold mining stocks are for speculation because they offer leverage to gold. This is actually true of all mining stocks, but the phenomenon is especially strong in the highly volatile precious metals.
Most typical "be happy you beat inflation" returns simply can't hold a candle to stocks that achieved 10-bagger status (1,000% gains). In previous bubbles – some even generated 100-fold returns. And we may see such returns again.
Here's a look at our top three year-to-date gainers.
What's especially remarkable is that all three of these stocks shot up much more than gold itself, on essentially no company-specific news. This is dramatic proof of just how much leverage the right mining stocks can offer to movements in the underlying commodity – gold, in this case. Two of the stocks above are on our list of potential 10-baggers, by the way.
So have you missed the boat? Is it too late to buy?
Looking at the chart, two bullish factors jump out immediately:
  1. Gold stocks have just now started to move up from a similar level in 2008;
  2. Gold stocks remain severely undervalued compared to the gold price. A simple reversion to the mean implies a tremendous upside move.
Now consider the following data that point to a positive shift in the gold market...
  • After 13 consecutive months of decline, GLD holdings were up over 10.5 tonnes last month. The trend is similar to other gold ETFs;
  • Hedge funds and other large speculators more than doubled their bets on higher gold prices this year;
  • Increase in M&A – for example, hostile bids from Osisko and HudBay Minerals to buy big assets;
  • Apollo, KKR, and other large private equity groups have emerged as a new class of participants in the sector;
  • Gold companies' hedging of future production – usually a sign of insecurity among the miners – shrunk to the lowest level in 11 years;
  • China continues to consume record amounts of gold and officially overtook India as the world's largest buyer of gold in 2013;
  • Large players in the gold futures market that were short have switched to being long.
  • Central banks continue to be net buyers;
  • To top it off, there's been no fallout (yet) from the unprecedented currency dilution undertaken since 2008 – and we don't believe in free lunches.
The gold mania train has not yet left the station, but the engine is running and the conductor has the whistle in his mouth. This means any correction ahead is a potential last-chance buying opportunity before the final mania phase of this bull cycle takes our stocks to new highs, well above previous interim peaks.
In spite of the good start to 2014, most of our 10-bagger gold stocks are still on the deep-discount rack. And you can get details of all of them with a risk-free, 3-month trial subscription to our monthly advisory focused on junior mining stocks, the Casey International Speculator.

Doug Casey is a world-renowned investor and author, whose book Crisis Investing was #1 on the New York Times bestseller list for 29 consecutive weeks, a record at the time.

He has been a featured guest on hundreds of radio and TV shows, including David Letterman, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin, NBC News, and CNN; and has been the topic of numerous features in periodicals such as Time, Forbes, People and the Washington Post.

His firm, Casey Research, LLC., publishes a variety of newsletters and web sites with a combined weekly audience in excess of 200,000, largely high net worth investors with an interest in resource development and international real estate.

See full archive of Doug Casey articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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