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Last week, I heard that Jim Rickards had a new book out, called ‘The new case for gold’. I immediately ordered a copy, and I have to say, Mr. Rickards does an excellent job of refuting various myths surrounding gold, and more specifically laying out a groundwork for the role of gold in the global financial system in the future. This book is recommended.
As I finished reading Rickards’ new book, it hit me that his projected ‘golden’ future has enormous implications for the financial markets. It struck me that when a real buying frenzy occurs in gold, the market would be running out of gold for immediate delivery. The term ‘precious metal’ would get a whole new meaning to it. This scenario would have major consequences for investors, as they couldn’t protect their capital with gold anymore.
But before I go there, let’s look back at history, like Rickards does, and research why gold stocks have become the most hated equity class on the planet. It all start right after the turn of the century. Gold was ending its multi-year bottoming phase, and gold equities were cheap as dirt back in those days. The market started bidding up gold stocks, as they became a value play. With the first bull cycle in gold picking up steam in the first part of the last decade, prices in gold stocks went ballistic. Going from a deep discount to a full valuation in 07-08. But still, this was not a crowded area in the market. Gold stocks were not popular, at all.
Then, the credit crisis hit, and the general stock market crashed. Gold stocks crashed even more so, again tumbling into deep discount territory. And that’s when the general investment public started noticing gold stocks, as gold didn’t crash along with the general stock market. Gold just corrected, nothing more, nothing less. Investors started bidding heavily on gold stocks. The sector made an impressive V-shaped move, fourfolding in two years. This time around, gold stocks were on every investors’ radar. Deep discount became hyper-valued.
And when hyper-valuation arrives, trouble looms. After peaking in 2011, when gold prices topped, gold stocks literally cratered. Not one time, but many times after. And for good reasons. Investors noticed that these companies were printing more paper (shares) than digging dirt. Management wasted good money, throwing it all away for mall investments, overpaid acquisitions and fat bonuses. The sector became a sick part of the market, much like technology did after its bust in 2000.
Nowadays, gold stocks have become the most hated and abandoned area in the market.
So that’s when it hit me. A new case for gold would also create a new case for gold stocks. Because, if gold would again become the most precious asset in the world, who wouldn’t want to own the companies that dig the yellow metal?! As gold gets scarce for investors, a full-blown buying hysteria could hit gold stocks. Ownership of these equities would be the only way to get ownership of physical gold, even if the gold is still in the ground.
Investors would be paying up for a premium on the assets of these companies, but there is more to gold stocks than only gold. Gold stocks are companies that earn income and have a cashflow. This cashflow will manifold, in case of a gold price going much higher in the scenario which Rickards lays out. How much higher is anybody's guess, but I could envision gold going to $5,000 per ounce (and beyond). This would send the cashflow for gold producers ‘to the moon’. Throw a revaluation on top of that, and you could see gold stocks going to levels no man has ever seen before. In this scenario, the Gold Bugs Index – in short ‘HUI’ – could elevate towards 2,000, maybe even 3,000. Currently, the HUI stands at 200...
So while there is a new case for gold to be made, this is even more so the (new) case for gold stocks. This segment is ready to emerge in a new, major bull wave, going from the current deep discount to a fully valued level, which again could result in a tenfold move, like the one we saw in the first part of last decade. As the new book of Jim Rickards is on my ‘recommended reading’ list, I also recommend reading the Gold & Silver Report from Secular Investor, which is a monthly specialized publication for the gold stock sector, and consists of a Premium Shortlist of the 40 Best Gold & Silver Stocks.
Nico Pantelis, Head of Research
Secular Investor
Secular Investor offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies are transformed into the Gold & Silver Report and the Commodity Report.
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