What asset class of equities has THE best fundamentals today but is still trading at bargain prices? Gold mining stocks.
Gold mining stocks remain an ultimate investor bargain, even after many of these companies have risen significantly off the panic-lows in March.
Before proceeding further, an important caveat. No one is suggesting that mining stocks can or should replace a significant holding in gold (and silver) bullion.
Precious metals continue to have an important role as financial/monetary insurance and a general safe haven for wealth. That has never been more true than today.
However, when it comes to pure ROI, gold mining stocks are in a league of their own among asset classes. Consider this.
Anyone following the sector knows that gold is now within spitting distance of its (nominal) all-time high on August 22, 2011 of $1,917.90. It’s already hit new all-time highs in every major currency – except the U.S. dollar.
The Big Banks, perennial gold-haters, are now born-again gold bugs: lining up to make their own bullish forecasts.
Now consider this. Where will the actual metal be found to meet all this new gold demand?
Red-hot gold demand, no supply
In the financial panic in March, a generation of investors who had shunned gold suddenly decided they needed some of this ultimate financial insurance.
The result was a run on the limited gold inventories of traditional bullion dealers. For several weeks, there was virtually zero real metal available.
Gold-starved investors turned to the paper-gold market at the Comex. Previously, traders “standing for delivery” (taking delivery of physical bullion) in the Comex futures market were rare.
Now contract-holders in New York are taking delivery in record numbers, as
laid out superbly by Craig Hemke of TF Metals.
Gold available to investors
above the ground is rapidly dwindling.
Now consider one more extremely important fact: there is also a supply crisis with respect to (known) gold reserves
beneath the ground.
The gold reserves supply crisis
Demand for gold is spiking. Supplies of gold have never been tighter.
The amount of known gold reserves for the gold mining industry is at a 30-year low.
At a time when supplies of gold have never been more limited,
the gold mining industry is completely unprepared to replenish exhausted global inventories of gold.
Ultimate set-up for investors
Here is an “investing 101” question?
There is a severe shortage for a particular commodity. The companies producing this commodity will be unable to meet demand.
Are you better off investing in the commodity or the commodity-producers?
Answer: the commodity producers. Commodity producers offer natural leverage to the commodity they produce.
Whatever return can be earned on a commodity in a commodity bull market can be beaten by the returns from the commodity-producers.
It gets better. Even with the gold market red-hot, mining stock valuations are still at depressed levels.
The chart above compares the HUI index of gold mining stocks to the price of gold. The ratio hit a
near all-time low in March.
Arguably, the greatest bull market of all time for gold mining stocks came from the end of 2008 through early 2011. Ten-baggers were a dime a dozen.
Look at the HUI-to-gold ratio at the start of that rally: >20.
Even after gold mining stocks have nearly doubled off their low,
gold mining stocks are still roughly 20% cheaper today than they were at the start of the greatest rally in these stocks.
The difference? Fundamentals for the gold market itself are even stronger today than at the end of 2008.
Own the whole supply chain
In this ultimate market for gold mining stocks, investors should have broad exposure.
Hold some gold producers (obviously), as the starting point in generating leverage on your investing dollars. But the real money will be made farther down the supply chain.
The world’s senior gold producers are desperate for new gold deposits to replenish their own pipelines. What does that mean? A bidding war on prospective gold deposits.
Cardinal Resources (CAN:CDV / US:CRNDF / AUS:CDV) received
an all-cash offer for the company and its 6.5 million ounce Namdini gold deposit. The offer represented a 75% premium to its current trading price.
This week, another suitor stepped up with an offer
10% higher than the original offer. Will Shandong Gold (the original buyer) come back with a higher counter-offer of its own? Will yet another bidder emerge for this deposit?
And this isn’t the first bidding-war among gold mining companies.
Three companies recently presented offers for junior gold producer
Guyana Goldfields (CAN:GUY / US:GUYFF).
As supplies of gold continue to tighten both above and below the ground, competition for ounces-in-the-ground can only intensify.
If investors don’t bid up the prices for companies sitting with significant ounces in the ground, then M&A activity will drive prices higher.
However, as good as the prospects are for companies that are developing known gold deposits, these companies still don’t represent the maximum investor leverage when investing in gold mining stocks.
New gold discoveries: maximum hockey sticks
The world has never been more desperate for new supplies of gold. Yet gold mining stocks are still historically cheap.
Put these two factors together and it means that new gold discoveries have never delivered more explosive gains for investors.
Great Bear Resources (CAN:GBR) has gone from CAD$0.40 in August 2018 to as high as CAD$19.83 earlier this year.
That’s nearly a 50-bagger.
The punch-line? The vast majority of those gains came with the gold mining sector wallowing at depression-level valuations.
Consider the potential for investor hockey sticks with new gold discoveries that take place as mining stocks are now in a full-blown rally.
Hold some gold. There have never been better reasons to do so.
However, for investors looking for ROI that can dwarf even the NASDAQ bubble-stocks, invest in gold mining stocks.
DISCLOSURE: The writer holds shares of Cardinal Resources.
