By Jeff Clark, Editor for Casey Research
For years, gold bugs like Doug Casey and his team have been saying that once gold takes off to stratospheric heights, it will take the gold mining stocks with it. It’s called the “Mania phase” of the commodity bull market.
Has this time arrived now?
If it hasn’t, it sure does a good look-a-like job. In the last weeks, the gold price has reached new records almost daily – the latest intraday high being $1,226.50/oz. The Chinese government has been urging its 1.3 billion citizens to buy physical gold and silver. And serially successful fund managers are beginning to load up on gold and gold shares.
BlackRock is a global commodities investment fund with a total of $1.4 trillion under management and serves as manager and adviser to the U.S. Federal Reserve. Not only did BlackRock state last month that “Central banks will be net buyers of gold this year as they diversify away from the U.S. dollar, marking a reversal of a decades-old trend” – the fund itself has a total of $4.655 billion invested in gold shares. Comparing the size of the gold stock market to the size of their portfolio, the 0.3% of their assets said to be invested in gold shares comes to something like 1 to 2% of the gold share market.
Financial website Minyanville agrees that “The smart money is already piled into gold,” listing high net worth investors like George Soros and Jim Rogers, and well-known fund managers like Bill Gross and Kyle Bass of Hayman Capital, Donald Coxe of Coxe Advisors, and David Tice of the Prudent Bear Fund.
The proof is in the pudding: On December 1, the Canadian TSX stock exchange posted its highest close in 14 months, and since the end of September, the S&P/TSX gold index was up 13%.
"There are really only four sectors in Canada — mining, energy, financials and everything else," Colin Cieszynski, market analyst, CMC Markets Canada, told the Vancouver Sun.
"For the most part, the seniors in the energy group have been flat for awhile and the banks have been flat for three months. One of the only areas that has been moving with a sizable weight on the index has been the mining sector. Since (gold) is one of the only areas moving, it's being noticed."
So, should you jump into gold stocks with both feet?
Louis James, senior editor of Casey’s International Speculator, one of the world’s most respected gold mining stock advisories, warns of throwing caution to the wind. In a recent interview with The Gold Report, James stated, “Gold stocks are . . . highly, highly speculative. Most gold companies don't have any gold; they are exploring for gold or developing projects that they hope will be economic. Only a few actually produce gold, and even the biggest producers are highly volatile, because the price of their product fluctuates constantly and strongly.”
“If [the juniors] do make a discovery, they go from having literally nothing but a geologist's dream to having something of measurable value. The difference in valuation can be huge; this is how it's possible to get 10-baggers or even 50 times your money on one of these stocks.”
Discerning the potential multi-baggers from the barren holes in the ground, though, is not an easy feat – but the market, says James, has done part of the work for investors.
”In 2007 and 2008, before the jitters, the market was overvaluing a lot of companies, practically anything with ‘gold’ in its name. Some of these companies didn't even have any assay holes drilled into their prospects; all they had were theories and hopes, and they were trading for tens of millions of dollars. Since last fall's crash, there's been quite a separation of wheat from chaff, and many of the companies that had nothing but theories or hopes have not recovered significantly.”
Still, James and his colleagues at Casey Research are expecting another market correction before gold – and by extension, gold shares – begin their trip to the moon: “If you're psychologically predisposed to being nervous about your investment, and you know you'd have a hard time dealing with a drop of 30%, 40% in a month or two, maybe this is not a good time to be buying speculative gold stocks.
“That having been said, if you stick to quality companies, buy an initial slice of your ideal position now, and fill out the rest of your position at a lower average price if it fluctuates downward, you preclude the possibility of missing out on a stock that takes off. But you have to believe in your picks strongly enough to see a sell-off as a buying opportunity.
“Our general recommendation right now is to focus on the best of the best. Everything in the International Speculator portfolio has resources drilled off that can be defined by one of the regulation-complaint categories or another. And it's all gold and silver right now.”
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