Why You Have To Own Gold, Silver And Precious Metal Shares

April 15, 2015

I urge everyone to consider my arguments for investing in gold and silver, and the miners that extract it.

I am holding on to my post 2008 forecast for gold reaching $3,000-$5,000 per ounce by 2017 (and silver reaching $100) because the world’s largest governments continue their plunge into default, and cannot afford to let interest rates normalize if they don’t want to be forced into a rationalization.

It may be arguable at what point it became unfeasible in the US to allow the market to drive interest rates.  Admittedly, it would be unusual for the market to determine interest rates without interference from the all-knowing bureaucrat at any time, trained as they are in the art of spinning infinite financial verbiage.  Yet, since Volcker’s day, it has also become increasingly less feasible even if they wanted.

It seems so obvious to me that the bureaucracy is not only taking the path of least resistance – cheap money – but that it is also trapped in this policy, i.e. trapped in a lie to the public about the state of the government, and of the malinvested economy.  This can only lead the world into another stagflation.

In my original (2000-01) call for the bull market to end in 2013, it is true that I expected stagflation to have already occurred.  I hope you forgive me for not being prescient enough.  To my credit though, it is hardly arguable that we got the “stag.”  If that were not true the Fed would have long exited from its zero interest rate policy and likely would not have coordinated a global alliance to do the same thing.

As for the ‘flation’, or lack thereof, I failed to anticipate such a large demand shock in 2008, or the persistence of deflation fears, and other factors that encouraged cash hoarding by both individuals and businesses.  On the other hand, though, many economists underestimated how much money the Fed created in the post 2008 period.  This was because on the one hand they monitored the Fed’s own haphazard categories of money (hurray for transparency) and on the other they really just have no idea what they are talking about.  Think what you want but I know it is true when they pull out tired old phrases like “velocity of circulation”, or if they claim that while the central bank has created high-powered money it hasn’t made it out into the economy.  It is sitting there piling up in bank vaults, or so goes the lore  – and meanwhile the stock market averages are making new highs every other week.

Finally it is easy to forget that before the last tightening (2004-07) precipitated the 2008 financial and economic crisis prices were accelerating, especially for food and energy.  You can be sure that if there was no tightening and no demand shock the ‘flation’ part would have become a bigger problem.

But Its Postponement Is No Reason To Get Complacent About It

After all, among some of the other things that I did not anticipate was the Fed’s post-2008 policy.

I would have never believed back then that after being widely persecuted for causing the tech, real estate and commodity bubbles of the 1999-2008 period, the public would have let it get away with even more monetary chicanery –including the blatant bail out of its crony friends in broad day light.

The justification – to save the economy – is about as bankrupt as it can get but the nearly $5 trillion manufactured by the banking system since 2008 is motivational, thanks in part to your deflation fears.

They just laughed in our face and stepped on the gas pedal, driving stocks to highs that I did not imagine because I could not imagine them throwing caution to the wind like that, at least not back in the y2k years when “The Greenspan Put” itself was still relatively new.  The Fed wasn’t that bold yet.

But all lies start small.  Just a little bubble!  C’mon, mummy, just a little one??

Now they have to do it to cover up the biggest lie of all: that the world’s largest governments are insolvent today.  They are covering this up by having pushed interest rates on the least sound of sovereigns to near zero through various unsustainable inflationary schemes involving a global alliance of central banks and governments.  If economic law exists, the attempt to coercively suppress interest rates for so many years, and down to 50 year lows, is going to bring about unwanted consequences.

One thing that low interest rates will not bring about is more saving, which ultimately fuels investment.

Another thing they won’t bring about is less debt and more financial discipline.

Those are just a couple examples of the harm of the policy –all you have to do is keep thinking.

Significant Bottom at Hand?

I believe that gold and silver prices have bottomed; or if not, are close to it.  Granted, I have believed this for two years now and have been both right and wrong.  Wrong in that my number was $1350, but right in that it is not down a lot from there so far.  With silver I was more wrong, expecting it to bottom at $20-ish.  I am also a lot wrong about the gold shares, which I thought bottomed at the end of 2012.

The bottom in gold – modeled on a 1975 retracement scenario – would be $1050.

I cannot rule it out; I am just more bullish than that.

The more bearish projections out there are calling for between $800 and $1000 per ounce.

I think that assumes a secular bear – like the one that began in the eighties – which lasted 20 years.

That scenario has powerful implications but it is also based on rising real interest rates - which was only able to occur in the 1980’s because the Volcker Fed abandoned the cheap money policy.

The recent occurrence of rising real rates I don’t believe is very sustainable.

So I have ruled out this scenario because it does not fit the precedent historically or theoretically.

Likewise, I have long ruled out the debt deflation scenario conjured up by professor Fisher, one of the chief proponents of the Fed in its early days.  That scenario is not likely at the moment because there is nothing to restrict a central bank from printing money (i.e., that’s why they killed the gold standard) other than public opinion and political willand incentives favor it neither politically nor commercially.

Either preceding scenarios (<1050) are possible if the Fed were to stop printing and let interest rates normalize.  But we are arguing that it can no longer do this, and that it knows it can’t… not for long.

The only other way I believe you will see gold below $1000 again or silver close to $10 is if the Fed announced QE4 –but at the right time!  What would be the right time?  Hindsight knows best, but it is not here.  The ideal time might be after a little rally in gold and a 20% correction in the S&P 500.

If your investment time horizon is longer than a year the case for gold and silver is a no brainer, whether or not they fall a bit more in value first.  Technically, we are at another crossroads where it can go either way for the next $100 or so.  I would not try to outsmart the market at this juncture.

It is easy to be out right now.  And it was easy to be long in 2011.  Don’t do what’s easy.

I don’t want you telling me you wished you listened to me; I want you thanking me that you did!

Value Is Tough to Find These Days, Except in PM and Resource Shares

Today I want to focus your attention on gold equities, to which I presently suggest a larger allocation than bullion (i.e., 35 vs. 30%).  I would include other resource and energy sectors, including uranium producers, to a well-rounded portfolio these days, and increase that allocation to as much as 40%.

However, I recommend overweighting the gold miners on account of their likely counter-cyclicality.

The last time I was bullish on the gold miners when the rest of the stock market was topping was 2000.  Many investors worried then too that they would fall when the tech bubble popped.

It has been a miserably long bear market in gold stocks – the second longest I have ever seen in my 25 year career, 49 year young life, and as far back as the Barron’s gold stock data goes (1939).

As miserable as you feel about buying gold stocks today, I feel much the same writing about them.

But this is nevertheless the time to own them.  I do not believe in gold stocks as an asset class unto themselves and do not hold them up as a means of wealth preservation like I do the precious metals – and actual asset classes like stocks and real estate in the right circumstances (not the current ones).

The precious metals equities can be considered derivative of the precious metals story, but I think this too is a mistake that leads to the kind of blood bath we’ve seen.  Repeat after me: gold stocks do not suit a buy and hold strategy like a bona fide asset class.  I prefer to view them as any other sector or business, and just as susceptible to the vagaries of the business cycle and over investment as any.

I believe that the precious metals are the best guard against the aforementioned wealth confiscations for investors that seek a relatively long term buy and hold strategy of wealth preservation in a system where inflationism and interventionism are the norm.  The equity and real estate classes require more vigilance.  The stock averages are constantly rebalanced, for ex., and require compositional changes, if only to cull the businesses destroyed in the unnecessary downturns produced by the central bank’s unsound policies, let alone those that die away from technological or other forms creative destruction.

If memory serves, no other current Dow component besides GE existed in the 1920’s, and its composition has been changed often.  If you wanted to beat the average I would suggest that it would require even more vigilant monitoring of the composition of your equity portfolio than Dow.

Instead, a gold or silver ounce is still a gold or silver ounce –through millennia.

True: if our monetary system were sound, there would be no need to own gold or silver (as assets).

And since there’d be no malinvestment or business cycle you wouldn’t have to change your stock portfolio as often.  Value investors would reign instead of momentum traders.  Indeed, even in this climate, I prefer equity because I believe it offers a chance to beat my precious metals holdings, and for other reasons of convenience, diversity, and my personal risk tolerance level.  I think real estate is also a good long-term hedge and protection against inflation and other abusive policies of the central bank.  But both equity and real estate require some knowledge –i.e., what kind of real estate or what kind of businesses to invest in – which requires work and vigilance.  I’m not saying that gold and silver aren’t volatile.  Nothing is safe from that.  Nor am I saying the government won’t try to outlaw them in the future.  Although I don’t think they would succeed if they tried.  What I am saying is that gold and silver bullion offer the best passive way to save in this environment over the long term without having to work for additional returns –which can be very hard to obtain over gold/silver returns in this climate.

Stock and real estate investments have matured.  They are no longer cheap.  And they are making bubble like moves, broadly speaking – from the US to Japan – wherever central banks have been busy transferring wealth and the command over the economy’s scarce resources to Wall Street.

I don’t know when it is going to end but the extent of the interest rate suppression, globally, assures us that it will end, and likely with a thud.  The Dow/Gold ratio is headed back to 1x, though that will not be evident until the current trend reverses, and/or we see the price inflation that will be inevitable once the public realizes why a market driven normalization of interest rates in the ‘advanced’ economies is no longer possible without bankrupting the states that protect the banking and financial monopolies.

Unless some public pushback forces the authorities to deal with the fundamental problems of adopting big government ideas that no one can pay for, let alone getting them to liquidate the public debt and privatize public assets, the precious metals investment strategy offers the best long term value, imo.

This is particularly true from here; in what must be a late inning stretch for the latest boom any way we slice and dice it.  You will never see gold or silver bullion become as worthless as Citigroup stock did.

Even if they fall another 25%, I strongly suggest buying, just based on my view that bullion is currently the cheapest of the asset classes that can protect investors against inflation and other forms of theft.

With regard to gold stocks, I make an additional plea to value investors and speculators with a higher tolerance for risk (and especially equity oriented investors), and who are currently on the sidelines.

The capitulation has already occurred.  All that is left is a graveyard.

I suggest a disciplined approach of wading into the sector slowly and picking off the babies that were thrown out with all the other prior bath water, weighed down by the sector’s current depression.

I don’t know if they will get cheaper first but I don’t believe there’s another capitulative climax in the cards, and I don’t think these types of valuations will last for very long regardless.  The drought in the juniors may last a while longer (than the recession in the miners) because of the usual funding risk that accompanies a general equity downturn, though that may already be overdone.  Historically, however, the majors are not very timely in their own investment program, tending to buy high and sell low just as much as anyone else, according to my own analysis of M&A trends going back the past two decades.  That trend may reflect the fact that mergers and acquisitions are typically funded with equity, which may be cheaper than cash at the top of a cycle.  Having said that, there is always the one or two that are making timely acquisitions at the bottom, like Newmont and Goldcorp did in the early days, or like B2gold, Agnico, and (hopefully!) IAMGOLD are today.

They will all reap the benefits tomorrow.

And maybe the gold or silver price come back will be so sharp that it eliminates funding worries.

[By the way there may be an indicator in the above chart: note that when the HUI makes a new high unconfirmed by a higher high in takeover related transaction values it has been a reliable sell signal.]

I’ve written to you about ‘why’ the gold story is still unfolding and why you should own gold or silver, and why the stock and bond markets are overvalued.  Here I want to urge you to act.  I know our picks have been decimated in this decline and that I’ve been calling a bottom for two years now.  But I do have a tendency to be early and long term in my investment horizon.  Anyone that has followed me for longer than the past few years knows that my general track record in making calls is still quite sound at both the macro and micro level.  However, the former, in my opinion, is much more important as it sets the tide.  You will do much better picking the sector favorites going into a sector upturn than trying to pick stocks in a sector where the tide is going against you –as I learned by ignoring the tide while putting out my monthly buy recommendations.  That’s because I didn’t expect such a large ebbing.

I doubt this plea will sell any new subscriptions because I am cynical.  I fear the only time people will do what I tell them is when it’s too late, which is usually after a string of successes.

But why not try something different this time?

Prove me wrong.

Why not follow my advice when it is least popular?

And don’t just think about it; don’t just put it on your radar.

Go out and buy some of our picks here.

Just remember to overweight your allocation towards the top (core) positions.  They consist in producers I think will survive this trough.  The allocations are suggested.  I would suggest allocating up to a 35% of your financial non real estate wealth in a portfolio like this at this time; the allocations mentioned in the table refer to the segments comprising the portfolio here.

Don’t plunge.  Just pick away over the course of the year.

I have developed a portfolio of about 15 companies I’m comfortable with and will continue to grow this list to about 20 names.  We will be starting to introduce new names again soon, as well as other related services.  But start with this short list if you live on this continent.  I predict that this portfolio will be up from 300 to 500 percent over the next three years –plus or minus.  The last time I constructed a portfolio of gold stocks in a trough was 2008.

They returned nearly 300% from then to their peak values in 2011.  Gold stocks returned even more in the 7-yr period following Y2K.  This time is not different.  We are at a cyclical low for this sector.  Don’t waste time chasing the crowd.

Ed Bugos is a mining analyst, investment banking professional, and senior analyst at The Dollar Vigilante (an online guide to surviving the dollar crash), with more than 20 years experience in the investment business advising clients on portfolio and trading strategies.

The term “carat” comes from “carob seed,” which was standard for weighing small quantities in the Middle East.