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« Time to Sell Your Gold? | Main | How Green Are Gold's Blue-Chip Mining Stocks? »

Confessions of a Gold Analyst: "It's All My Fault"

Common sense dictates that when you need information or advice on something you're unfamiliar with, you consult with a professional. That's what people do, whether refinancing a home, choosing an insurance product, or fixing a broken heater. While professionals certainly have their own agendas, they still know more about their products or services than others, and can at least help them make more informed decisions.

Bank and brokerage analysts know their products, too. But when it comes to helping you make an informed decision about where the gold market is headed, they have, as Rick Rule is fond of saying, a record unblemished by success.

Every year major banks and brokerage houses provide their four-year forecasts for the gold price. The following chart documents the average price projection of 25 top analysts over the past seven years, many of whom specialize in the resource industry. I might suggest pushing away from your desk so that when your jaw drops it doesn't hit the keyboard.

You can see that every year since 2007, bank and brokerage analysts have as a group predicted that gold would fall, sometimes dramatically, over the next four-year period. For example, in 2007 the consensus of all estimates was that gold would decline from $656 to $523 by 2011. Instead, the price rose 140% to an average of $1,572 that year.

Similarly, they predict this year that gold will fall from $1,665 to $1,515 by 2017. Even if they thought gold would move higher the first year, their best guess was that it was ultimately headed lower. So far they've been wrong every time.

For the most part, these are analysts who do nothing but study the resource markets all day long. It's their job. No one gets it right all the time, but this kind of track record is embarrassing.

The obvious lesson is for investors to ignore price predictions from the major banks and brokerage houses – they just don't get it. I'm sure most readers of this publication already know that.

However, there's a much bigger implication of this data that may not immediately come to mind…

  • Why would I as a fund manager or institutional investor buy a gold stock if my analysts tell me the price of gold is going to fall?

Answer: I wouldn't.

If the price of the product a company sells is expected to decline over the next few years, would you buy the company's stock? Its earnings are almost certain to fall. As a manager of millions (or billions) of dollars, you wouldn't buy any investment with this kind of outlook.

There's more. These same banks and brokerages have also been predicting the price of oil will rise (almost) every year. While they've occasionally been right about that, it means that margins for the gold producers would be expected to fall, since roughly 10% of their costs are related to fuel. So again…

  • Why would I as a fund manager or institutional investor buy a gold stock if my analysts tell me profit margins are expected to fall?

Answer: I wouldn't.

It doesn't matter that analysts have been consistently wrong. What matters is that if the institutional world believes the gold price is likely decline and/or that margins are likely to fall, they're not going to stick their necks out and buy gold stocks. They could lose their bonuses or even their jobs if their analyst's predictions came true and they'd bet against them.

This could be the explanation for why hedge funds, institutional investors, and other large investors haven't entered this market en masse and could account for the disconnect between the price of gold and the trajectory of gold stocks.

If institutional investors are largely absent from this market, why is gold rising every year? Gold is not a trading sardine for institutions. Gold is supported by strong physical demand from individuals around the world and from central banks. Read our take here.

We see the potential in gold equities, as we believe the price of gold is going higher, but big investors with billions of dollars to pour into an market don't. Their money, for the most part, is still on the sidelines.

This phenomenon leads us to predict that someday these institutional investors will enter this sector en masse. Once the facts sink in and the institutional world becomes convinced gold and silver prices will maintain a sustainable uptrend, they'll be much more attracted to the equities – and just as stubborn about changing their minds once they're on board.

Now, it's possible this group may have to be beat over the head by relentlessly  rising precious-metals prices before they enter the industry. They'll have to believe that, say, gold hitting $1,900 again isn't a temporary fluke but a sustainable uptrend. I don't know what price the metal would have to maintain or how long it would have to stay there before they jump on board, but given the above chart, I think it's safe to say they won't be the first to the party. I personally think it will be something along the lines of what we outlined in the recent Hard Assets Alliance letter.

Whenever and however it happens, though, the stampede from institutional investors into this tiny industry will be sudden and dramatic, because they tend to have a herd mentality. No one wants to be left behind. Just like they don't want to risk buying something all their colleagues are ignoring now, they'll rush to own the popular and exciting investment when gold stocks have their day.

The consequence of this will result in dramatically higher stock prices. How high? Well, this group loves to use price models, and fair value for Newmont Mining (NEM), based on its Reserves, would be about $200/share (it's currently trading around $44). And that's at $1,700 gold – as the spot price rises, the value of NEM will rise exponentially, since gold would be rising faster than costs, even when inflation kicks in.

That is why I'm excited about the producers. It's the first place the institutional world will turn when gold makes a sustained move higher. Come the day those investors believe gold is about to become part of the monetary system, that bonds are no longer a safe place for money, that inflation is about to get out of control, or whatever it might be that changes their paradigm, they'll flood into our little market and push share prices higher by an order of magnitude.

When this shift gets under way, we'll already own the stocks that institutional investors will be clamoring to buy. Maybe we should thank them now.

We wish you all a successful and profitable year ahead.


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Reader Comments (2)

You're right on with this, Jason, as far as you go. But now let's get down and dirty. The question always has to be asked in politico-financial circles, as in pursuing any potential crime or fraud in the legal courtroom: Cui bono? Who does this benefit? We know that truth is now squelched for a keep the status quo, as sick as it is, appearing to be healthy to the sheeple people, who prefer sweet lies to bitter truth. That means that the only rating firm that even tried to be somewhat honest about the rating of a country whose debt is now >100% of its GDP (and even the GDP number used is a phony high number) has been shut out of telling the truth about this country's creditworthiness for the next 18 months.

These ratings for gold/silver, that they are always on the verge of tanking...benefit those who own the apparatus and authority to create counterfeit money and distribute it. PMs are the mortal enemies of fiat currency, just as the truth is the mortal enemy of the Lie, and therefore, as said Goebbels, the Minister of Propaganda under Hitler, the truth is the enemy of the state.

But again, as I said, let's go one step deeper at what has happened with the PM shares. The action for years now has been totally counterintutive in terms of the prices of silver and gold. Good news is almost invariably sold off, prices struggle to rise on up-PM days, but then on a takedown day of the PMs on the CRIMEX, the shares are absolutely destroyed. Those who think they have their finger on the pulse of just about EVERYthing have to come up with "logical" rationales for this. Well, I agree with some of their reasons as having some small part to play, but it's NOT just b/c the mining companies and their executives are inefficient or incompetent or seeing higher costs. We know some of that is true, but that, IMO, is only a very small piece of the picture. Shareprice is capital...decimate shareprice and you decimate my capital in many cases.

This, too, in my book, has been a concerted effort on the part of the fiat counterfeit currency cabal to turn interest away from their enemy: the PMs. This includes naked shorting, perhaps massive, to keep the shares down. Those who do this know that first of all, in the investing / trading sphere, the shares "confirm" the metals...if the shares don't go up with the metals, then likely the metals will go back down, etc. And they also know that there'll be plenty of technical "experts" that will read the "tea leaves" that the cabal's hedgies et al have set up thru their market manipulations and matter-of-factly tell the other traders that "whoops"...if it falls below that line, it could possibly tank to that line below. Self-fulfilling prophecies. Thank you, Mr. are the unwitting dupes that give credibility and stature to their manipulations.

I for one could wish that the so-called technical experts would just shut up!! If you want to trade the paper market, then trade it. But DON'T call it the PM market!! That is at the heart of the is a total fraud...a total >100:1 fractional Ponzi scheme. And those (actually mainly one in silver and one in gold) who hold the massive short positions can put their algos into motion and put the paper price just about anywhere. Lilkewise, being as there is essentially NO oversight or prosecution of the TBTF banksters by either the CFTC or the SEC, manipulating the prices of the equities is a piece of cake...down down down them into the ground, deny funding, pay out <1% interest, but charge 10-12% interest or more, short them to the point where they don't come back and bank the profit.

It's a scam...and that is why investors should think long and hard about the shares. A healthy market depends on healthy laws and healthy administrators of those laws to maintain equality among all parties. The market today is a casino, run by those who are allowed to trade and function outside the laws. If there is one reason to get out of the PM equities, it is this is not a fair market. Having said that, I still have my bets in it. But I have to consider very strongly what more it will take for me to simply sell out and go totally physical...jt

January 26, 2013 | Unregistered Commenterjt

Very well said jt. It's as rigged as rigged can get.

January 27, 2013 | Unregistered Commenterfallingman

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