Compelling Opportunity:
The Bull Market In Gold
"Investors continue to chase overpriced technology stocks when they should be getting in on the early stages of the bull market in Gold," says John Embry, President of Sprott Asset Management Inc. writing in Investor's Digest of Canada.
The gold story that is currently unfolding is arguably one of the most compelling opportunities in recent memory, but there is remarkably little interest from the vast majority of investors who prefer to look in the rear-view mirror and chase overpriced technology stocks in the expectation that the halcyon days of the bubble are back to stay.
But why should anyone be surprised? Because gold continues to get bad press even when the message is extremely positive. There is no better example of this dichotomy than the recent article on gold in The Economist, justly regarded as one of the world's most influential publications although admittedly no fan of gold at the best of times.
While detailing the very positive changes for gold demand in China due to a dramatic liberalizing of rules pertaining to individual ownership, the magazine couldn't restrain itself from poisoning the article with this opening:
"In uncertain times, gold still retains a special luster for some investors: although its price has fallen back from recent war-spurred highs. Yet gold's golden age, so to speak, is long gone. Since the 1970's, it has become almost like any other precious metal, and increasingly one that central banks no longer care to hold in reserve."
With an introduction like that, why would anyone care to read the remainder of the article, which was resolutely bullish?
However, this is exactly what one would expect to read in the early stages of a bull market where widespread skepticism reigns and only those who have taken the time and made the effort to understand the basic fundamentals of a subject get involved.
Last year, I had the extremely good fortune to manage a precious metals fund, which appreciated by more than 150 percent. The response to that was a spate of redemptions, which, by the end of the year, exceeded new sales. With bank accounts yielding next to nothing and the stock market not exactly putting in a scintillating performance, this was proof positive that the public was not yet ready to embrace gold.
Had I not experienced this phenomenon several times in my 40-year career in the investment business, I might be somewhat discouraged by this turn of events. However, the attitude toward gold at the outset of the great bull market of the '70s was exactly the same.
When gold was $35 per ounce in 1971 and President Richard Nixon closed the gold window in the United States, few people foresaw gold going anywhere, let alone to $800 per ounce in less than a decade.
Prior to the onset of the great bull market in equities in 1982, articles pronouncing the death of equities festooned magazine covers and no one could imagine that the Dow Jones Industrial Average index, which had essentially traded between 575 and 1,000 for 16 years, could increase more than 10-fold in the next 18 years.
People today may also forget that the crash of 1987 which many feared might mark the end of the bull market occurred at 2,700 on the Dow and that the index more than quintupled from the subsequent lows.
The point I'm trying to make is that at major inflection points the vast majority of observers have trouble grasping the change of direction, let alone the upside (or the downside in the case of bear markets) that may lie ahead.
As The Economist stated, gold's golden age is long gone and since the '70s it's almost like any other precious metal which, I guess, is better than calling it "a barbarous yellow relic," as John Maynard Keynes did many years ago.
What it failed to say, however, is that in the decade of the '70s it performed spectacularly and protected the wealth of those who were prescient enough to identify the inflationary environment that was ravaging financial assets.
In the '80s and '90s, when disinflation reigned and financial assets performed brilliantly, gold receded to the shadows, providing little competition for the spectacular returns on stocks and bonds.
But just as Dorothy said to her faithful dog Toto in the Wizard of Oz, "we're not in Kansas anymore," we are most assuredly not in that wonderful world of high real returns on financial assets anymore, either.
The financial landscape has changed dramatically and one's investment preferences had better change also.
I don't find it unusual that many gold analysts have great difficulty wrapping their minds around a materially higher gold price, given a 20-year bear market in gold and ongoing rhetoric that questions the validity of the metal.
Nor am I surprised that when I venture the opinion that gold could easily achieve a price of $500 per ounce within 18 months and might reach $800 to $1,000 per oz in the next three to five years that most people look at me as if I'm slightly deranged. This is just as it should be at the outset of what may well turnout to be one of the greatest bull markets in history.
The reasons for my enthusiasm are many: a yawning gap between mine supply and traditional demand, the inevitability of falling mine supply in the next few years, the amount of central bank gold that has already been mobilized in the attempt to suppress the gold price, the stale short positions and toxic derivatives in gold that litter the landscape and the emerging investment demand driven by concerns about the rapid deterioration in the U.S. financial scene and the vulnerability of the U.S. dollar.
All of these are subjects for more extensive examination in future columns, but the important thing to realize is that the time for gold is now.
There will be volatility probably considerable volatility but we're in the early stages of a multi-year bull market and investors should be utilizing a buy and hold strategy for their core positions in gold and gold shares and, if they feel comfortable doing so, trading the volatility of the sector at the margin.
I'm somewhat ambivalent on the question of gold bullion vis-à-vis gold shares at this juncture, and would recommend exposure to both. Holding physical gold can be quite cumbersome, but there are vehicles coming to market that will make this an easier process.
Portfolio Approach
On the share front, there are several solid precious metals funds (I can think of one in particular but modesty prevents me from mentioning its name) but if one approaches it on an individual stock basis, I would recommend a portfolio approach with:
A senior producer like Newmont Mining (NYSE NEM $29.31, 303-837-6018, www.Newmont.com);
A couple of intermediates like IAMGold (TSX IMG $7.41; 888-464-9999, www.iamgold.com), Wheaton River Minerals (TSX WRM $1.36, 604-696-3000, www.wheatonriver.com) or Meridian Gold (TSX MNG $15.35, 800-557-4699, www.meridiangold.com);
And a sprinkling of junior producers or exploration companies like Orvana Minerals (TSX ORV $1.49, 905-822-1463, www.orvana.com), River Gold Mines (TSX RIV $2.72, 604-696-3000, www.rivergoldmine.com), Southwestern Resources (TSX SWG $7.48, 604-669-2525, www.swgold.com, Metallic Ventures (TSX MVG $3.67, 775-826-7567, www.metalicventuresgold.com) or Golden Star Resources (TSX GSC $3, 800-553-8436, www.gsr.com) in order to guard against the risk of individual disappointments.
Editor's Note: Until recently, John Embry managed the Royal Precious Metals Fund, ranked No. 1 in Canada last year, with a gain in value of 153 percent. In March, Mr. Embry switched to Sprott Asset Management Inc. to run its precious metals fund, and was also appointed the company's president. Mr. Embry will write a column every other week for Investor's Digest of Canada, 133 Richmond Street West, Toronto, Ontario M5H 3M8, 1 year, 24 issues, $137.
