Thursday May 31, 2012
by Stephen Leeb, editor The Complete Investor
We are seeing an anomaly between the price of gold and the junior gold stocks as represented by the Market Vectors Junior Gold Miners ETF (GDXJ).
Since the end of 2009, gold has climbed by over 30 percent, whereas the junior gold miners have fallen by about 25 percent; that’s a 55-plus percentage point difference. For the juniors just to catch up to gold would imply a gain of about 80 percent.
Why such an anomaly? That’s because many juniors will require financing in order to produce – financing costs tend to be a rising target.
But on the other hand, the metal itself, as is true for so many other commodities, has entered a phase in which grades are declining rapidly.
Major producers from Barrick Gold (ABX) to Newmont Mining (NEM) are seeing costs rise dramatically. The only low-hanging fruit left in the entire gold universe is under the leases and land owned by the juniors.
Now back to that first anomaly. Massive liquidity, whether in Europe (a near certainty) or in the U.S. (very likely) will mean, again with a possible interruption, a massive jump in gold prices. This will affect, as interest rates drop below inflation, capital expenditures for developing juniors.
What kind of bull market can we expect? We’ll leave you with just one statistic: Between the beginning of 1979 and the third quarter of 1980, the big gold miners went up on average five-fold. But the juniors went up a multiple of that.
And back then they were not making up for lost ground. Take it from there and you can see why we believe the bull market in GDXJ could make the bull market in technology we saw at the end of the last century seem like a small blip.
Our caveat, of course, and we repeat this for what must be the third or fourth time, is that there will be a bump likely.
There may come a time in this transition when it will be necessary to sell gold for liquidity; that is, until the printing presses really get going, gold may be the only source for generating liquidity.
Do not lose your bearings, or lose sight of the prospects for what could easily be the greatest bull market of your life.
Learn more about this financial newsletter at Stephen Leeb's The Complete Investor.