Expecting Epic Gains in Gold Miners

by: Gary Tanashian October 27, 2008 | about stocks: GDX / GLD    
Gary Tanashian

Gary Tanashian

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Excerpted from the October 25, 2008 edition of Biiwii.com’s Notes From the Rabbit Hole

Throughout Greenspan’s inflation bull market (RIP 2003-2007), I was very bearish, fully aware of the impending credit and derivatives disaster that the Maestro claims not to have seen coming.  Long time readers know my writing included a comparison of the entire USA to the former poster child for corporate criminal excess, Enron (Amron).

But the theme was one of playing the cards dealt and despite my bearish bias, the cards being dealt by Greenspan showed ‘bull’ (I mean that in the literal as well as figurative sense).  Inflating the money supply at the first sign of systemic problems was his modus operandi and he was celebrated as the great and wise overseer of the long but ultimately doomed party in paper goods.  The operating theme from the outset (defined here as the beginning of my public life) has been one of inflation policy that begets the appearance of a sound economy and sound markets but in reality, is anything but.  Enter Armageddon ’08.

It is ironic that while I was bearish from 2003 to 2007, I made healthy profits each year as a trader, roughly doubling the broad bull market’s gains each year.  This is because I was not fundamentally attached, even to the gold stocks much of the time (due to their rising costs and status as an underperforming sector in the latter half of the ‘inflation bull’).  More ironic, however, is that now, in the midst of a crisis I knew was coming I have endured severe paper losses as an investor (in accounts I allow to be exposed to risk).

The most recent target for HUI is 150 and it came within .27 of that on Friday before turning up and leading gold higher.  But this could simply be a pause to build a bit of hope before the next dunk.  The broad market is in danger of new lows (into capitulation) which could suck the precious metals stocks down yet again.  But with each hard down I become more bullish.  As an investor.  I realize that ‘investor’ can be another way of saying ‘bag holder’, but that is not the feeling I have right now.  I hold this precious bag tightly because nobody else wants it and the nuggets in there are literally being given away, so I continue to pick up these discarded nuggets with each decline.

The title of this piece is ‘Epic’, and that is what I expect the gains to be in the gold sector over the next 1-3 years.  With producing miners finally achieving the coveted ‘value’ label and junior and exploration gold stocks selling in some cases below cash on hand with properties being looked at by the market as liabilities (in that they need to be funded), folks, you know what we have here don’t you?  Mania.  Downside bearish mania (along with margin and redemption related forced selling).

There is a good chance that this is the play that people wait a lifetime for, but after the fact will bemoan their inaction due to fear.  But the public and its policy leaders who all kept their heads buried deep in the sand during the cyclical bull market have now done the predictable 180, worshiping fear much as they worshiped greed just a short while ago in what now seems like a different life.  Mania is mania and it works both ways.  Smart people will fade mania.

I suppose it is up to the people who rightly saw this mess as over valued and/or a disaster in waiting to move in and pick up the pieces.  John Hussman and Warren Buffett are doing so, as is Jeremy Grantham. I believe the gold sector holds the best and nearest term potential gains, but real contrarian and value investors are now becoming interested in many markets.  For those with patience, this stance could indeed be epic.


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This article has 16 comments:

  •  
    Oct 27 11:26 AM
    Another article pumping gold that doesn't mention that the current worldwide deflation.

    An overview from January that has been proved right:

    globaleconomicanalysis...
    Reply | Link to Comment
  •  
    Oct 27 11:49 AM
    I think that being "patient" is indeed the key here. The way the current market is playing and the sheer amount of fiat money that the FED is pumping into the street over the next few months is going to have an effect in the long term that will be bad for the dollar which should, if we can keep out of Marxist/Socialist ideologies in the market very well could lead to, as you say, "epic gains".
    Reply | Link to Comment
  •  
    Oct 27 11:54 AM
    Hal confirms the stereotype of goldbugs as Rush Limbaugh-listening nuts ranting and raving about "Marxism."

    Buy and hold? Well if you had done that in 1980, you only would have had to wait 28 years to make your money back.

    See you in 2036 Hal. In the meantime more rational investors will be buying companies that produce and sell goods and services for a profit. Your metal will sit in you backyard bomb shelter collecting dust while normal investors will enjoy reaping dividends and capital gains.
    Reply | Link to Comment
  •  
    Oct 27 12:34 PM
    Weston:

    Without outside intervention, I would say we indeed are headed for a deflationary depression.

    Central bankers, however, based on their own philosophy as well as that of the politicians who pressure them, are committed to printing as much money as necessary to fill the sinkhole.

    The scenario of continued deflation does not factor in the massive ongoing monetary intervention.
    Reply | Link to Comment
  •  
    Oct 27 03:57 PM
    bot: banks AND borrowers need to cooperate with the Fed if the collapse in the money supply is to be corrected. Right now they are not. Consumers and businesses are being crushed with record levels of debt, and many, perhaps even most, financial entities are insolvent if their assets are marked to market.

    Japan has done everything it could to fix its deflationary spiral, but failed. The Nikkei and nominal land prices are well below levels from the early 1980's.

    It is certainly possible, in theory, that we will see an inflationary overreaction to the current inflation. That's why I am short gold via GLD puts rather than outright shorts: my downside is limited.

    Nonetheless I think this is very unlikely. Japan 1990-2008 is not the only example of prolonged deflation BTW, this happened to the US during the great depression as well as several times between 1865 and 1914.

    Finally, even if deflation is not as bad as I fear, a return to the low stable inflation of 1984-2000 would still be horrible for gold.
    Reply | Link to Comment
  •  
    Oct 27 04:05 PM
    Worldwide deflation?

    What world are you from?
    Reply | Link to Comment
  •  
    Oct 27 05:36 PM
    I agree, gold will have its day, albeit AFTER all of the institutional liquidations are complete and the U.S. dollar begins to plummet. However, totally disagree with the word 'Epic'. When said liquidations are mostly complete and the dollar declines, gold will post "satisfactory&quo... gains, preserving capital in comparison to the long-term downward/horizontal trend equities will be making. Good to have a little in the portfolio, but no reason for a big fuss.
    Reply | Link to Comment
  •  
    Oct 27 05:38 PM
    BTW, "Expecting" sounds too much like hoping. Perhaps "hedging" for possible gains in gold (after enduring further dropping from here).
    Reply | Link to Comment
  •  
    Oct 27 08:02 PM
    Well, i'm personally buying chinese gold mines. They own their mines and just buy from themselves.
    It's all supply and demand. Since the US and IMF won't supply gold for their reserves they just produce it locally. I believe gold will go to 1500 with the main buyer being china and India a close second. in the meantime i keep 10% in gold
    Reply | Link to Comment
  •  
    Oct 27 08:20 PM
    Well, as bearish as I have been in Gold lately, this time around I have to agree with the author because he sees the big picture long term. I will never expect Gold going though the roof up to USD 5.000 but a good run to USD 1.400 derived from a depreciating USD (into 2009) likely inflation back in business and scary numbers in money supply (all 3 factors are corelated). So what's the point in buying Gold is you have to buy a ton of it to see a decent return, well that you can actually buy significant amounts of Gold by being patient and picking the bottom then you can hold it for 3 years and make good money by skipping volatility and therefore lowering the risk. Remember Gold at USD 600 on January 2007? well that was a base and the price never look back down, I see a bottom around USD 600 year end, buy small amounts, probably 600 Oz or 1000 Oz (for a small investor) and then load it up with 5.000 Oz once once the base has consolidated around UD 600 and the USD 660 level had been broken on the way back up, tha't is a strategy. Play paper gold on margin in an account overseas and you will be just fine probably doubling up your investment in a couple of years, I won't mess around with physical gold, too risky for my limited and diminishing networth. Disclaimer I don't have position in Gold at the moment nor do i expect to enter the Gold market anytime before Dec 2008.
    Reply | Link to Comment
  •  
    Oct 28 05:52 AM
    Sorry people, the money supply growth all occured 1993-2006.
    Reply | Link to Comment
  •  
    Oct 28 12:36 PM
    I found this article to be great help regarding the current Gold and US$ situation and US political impact.

    www.stockresearchporta...-greenspan’s-failure-t...
    Reply | Link to Comment
  •  
    Oct 28 01:06 PM
    Mr. Weston: It is fine if you want to disagree with the article but a few points to consider...

    1) I have never pumped gold and in fact have had a potential target of 650 on the table since the March time frame. 'Potential'. I think 650 might even be optimistic given the intensity of USD liquidation mania now in force.

    2) I have often written that in a deflation scare, gold may indeed decline but it will do so much less than positively correlated commodities. Check gold-oil, gold-GYX, gold-silver. All moonshots for these ratios.

    3) I have been writing about deflation since 2004 but my stance is that we will get a deflation SCARE, and this is certainly scary. I have been bearish commodities for all of 2008 and into 2007.

    4) Nowhere in the above article am I talking about gold. I am talking about gold miners and positive effect on their bottom lines that the above ratios represent.
    Reply | Link to Comment
  •  
    Oct 28 01:12 PM
    Oh I see what it was. SeekingAlpha uses their own titles. The title of my piece is actually 'Epic'. That's all. Simply Epic. But I do believe we are having a nice little manic deflation overload. The mania has not yet boiled over however. The USD is the anti-oil. Just a few short months ago you could turn this liquidity mania upside down and you had the oil BUBBLE.
    Reply | Link to Comment
  •  
    Oct 28 01:18 PM
    Gold is down 10% from last year around this time. The Dow lost 31%.

    Got gold?
    Reply | Link to Comment
  •  
    Oct 28 01:30 PM
    Greg, I'm curious why you choose 1980 as a "buy and hold" date and not say, 2001? Or 1974? I bet if you take ANY asset class and go back to its all time high as a buy date, you won't have an impressive return! Inflation adjusted that high would be about $2500 today, or more than 3 times what it's priced at now.

    Do you think buying at the highest high of a market is typical? Do you think $650-$700/oz is the higest gold has been or will be?

    And do you really think the author is saying "buy and never ever ever sell ever" ? He's saying buy it soon, hold it a few years, then sell it when appropriate. NOT buy it, hold it till it rises and don't sell, then hold it till it drops to where you've lost money, and THEN sell! As the economic conditions change, the value of holding gold will as well.

    The author points out in his later comments that gold has done better than most other asset classes even as it "burst". (quiz: Which is better, losing 25% in gold for a few months (assuming you bought at the high) or losing 40% in the stock market?) Go check the market's performance inflation-adjusted for the last 8 years. It looks about the same as if you bought gold in 1982!

    I happen to agree that it will rise since we have $60T of future govn't obligations that could not be met even if we taxed all personal income 100%. So this "deflation" of a few trillion dollars will seem like a drop in the bucket soon as the printing presses pour money into the system like never before.

    We haven't even seen the dip in tax revenues from a recession yet. We'll be lucky not to hit $2 Trillion a year on-budget deficits within a couple of years. But hey, the dollar has strengthened 20% for a few months, so gold is obviously a barbaric relic, I'm selling! Nothing's stronger for the dollar than deficit spending, right?
    Reply | Link to Comment
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