The recent pullback in metals prices and mining stocks presents a great entry window for new investors to the sector
Epic bull markets are easy to identify – in hindsight.
Even at the midpoint, investors generally know that they are participating in more than just an ordinary bull market. Instead, they are capitalizing on (potentially) a once-in-a-lifetime opportunity.
There is now every reason to believe that precious metals (gold and silver) are moving into such an epic bull market.
Low interest rates are a major driver for precious metals prices. Today, interest rates are not only at record lows across the Western world. Intellectually bankrupt central bankers have promised to freeze rates at these reckless levels for (at least) several more years
Inflationary money-printing is a major driver of precious metals prices. Today, currency creation by Western central banks is out of control
Printing trillions in new funny-money to “stimulate” COVID-crippled economies. Printing trillions more in new funny-money to soak up the excess supply of Western bonds.
With the bonds of these hopelessly insolvent governments priced at record-highs, there are no legitimate “buyers” of this debt.
With debt-saturated economies adding trillions of dollars in additional debt – almost monthly – central bank money-printing will have to be maintained at this reckless, unprecedented pace just to delay Western sovereign bankruptcies
Precious metals bull market begins
Gold and silver prices were driven to absurd lows in March, during the worst of the COVID-related market panic. Since then, silver went from $11.50 to nearly $30 per ounce. The price of gold went from $1,460 to a new (nominal) high of $2,070 per ounce.
Then came a “correction”.
No fundamental reason. Economic drivers for the price of gold (and silver) could not possibly be more bullish. And we haven’t even begun to discuss the enormous geopolitical tensions that encircle the planet at the moment.
Regardless, the price of gold has been driven roughly 10% below its recent high. Silver has been more severely punished – driven more than 20% below its recent high of $28.89.
A buying opportunity. Correction, an obvious buying opportunity.
And for those investors who haven’t yet climbed aboard the precious metals bandwagon, it’s a great second-chance opportunity.
Valuations for gold and silver mining stocks look even more attractive. As I have pointed out since the early days
of this new bull market, the miners began this rally historically undervalued versus metals prices themselves (see chart below).
Gold mining stocks have never been cheaper relative to the price of gold than they are today. Never.
Framed another way, gold and silver mining stocks had never been a better buy.
Early in this rally, the mining stocks were just tracking rising bullion prices. Then they (finally) began leveraging the gains in gold and silver – as they are supposed to.
But even with gold and silver at their recent highs, the mining stocks were still relatively cheap, certainly in comparison to the broader markets.
While the gold and silver markets have been red-hot, mining company valuations have still been (literally) just average – at best. Plenty of room to run.
However, in the recent downturn in metals prices, not only have the mining stocks fallen. Relative to bullion prices, they have fallen even harder, as the chart above indicates.
After the recent pullback, gold and silver are a screaming buy. And the mining stocks represent even better value.
How to invest in precious metals
For investors who are new to precious metals, there are a couple of basic rules observed by sophisticated investors in this sector.
- Buy “physical” gold and silver only. That means bullion (coins or bars) not ETFs or gold/silver accounts.
- Avoid the senior gold and silver producers. With very rare exceptions, these companies are all chronic under-performers.
The mid-tier and junior producers represent superior value and growth potential. But even more leverage (and profits) can be found among the mining exploration and development companies.
This has been explained to investors before.
Mining companies generate natural leverage versus bullion prices across the supply chain, from early-stage exploration right through to production.
These mining companies are objectively cheap today, in a sector that has experienced a red-hot bull market. This is almost unprecedented in equities markets.
It’s certainly not what we’re seeing in U.S. mainstream equities, where share prices of tech giants (in particular) have completely decoupled from actual value.
Buying in cheap, in a market that is already in an established bull market.
That’s a great second-chance opportunity.