Gold Stocks a Buy, Declares Dan Amoss

Gold begins a new week up a touch from where it ended last week. The spot price as we write is $1,348. Silver is off a few pennies, to $27.45.

While the markets tread water, the Russians and Chinese are snapping up metal…

  • Chinese silver imports quadrupled last year, according to figures from Mitsui. Net imports of less than 900,000 kilograms in 2009 surged to nearly 3.5 million in 2010. China, long a net exporter of silver, became a net importer in 2007.
  • Russia’s central bank plans to keep loading up on gold. In 2010, Russia grew its gold reserves 23.9%, to 790 metric tons. Now the deputy head of the Central Bank of Russia has announced plans to add to that stash at a pace of 100 metric tons a year.

“It’s time to buy gold stocks,” declares Strategic Short Report editor Dan Amoss. “Top-down ‘macro’ analysis indicates that the bull market in gold stocks still has a long way to go. And bottom-up analysis tells me that gold stocks are cheap.

“I see the most likely macro scenario as follows: a steady rally in gold, a sideways stock market (some sectors up, some down) and falling Treasury bonds (rising yields) as more bond investors look ahead to a future of endless US budget deficits and decide to hit the Fed’s ‘QE2’ bid.

“The Fed’s balance sheet will probably double in size again over the next few years, filling up with even more Treasuries. The central banks in China, India and elsewhere are woefully short of gold – and stuffed to the brim with less-desirable US dollar assets – so they should continue to trade paper for gold and other real assets at a steady pace.

“More than an inflation hedge, gold is a hedge against chaos in the monetary system; people flee to gold when confidence in paper money crashes.”

Meanwhile, gold stocks remain cheap relative to gold, Dan says. Check out a chart of the HUI – a major gold stock index – divided by the price of gold. Leave aside the Panic of 2008 and gold stocks haven’t been as cheap by this measure since 2003:

The HUI-to-Gold Ratio

“This fact is even more compelling,” Dan continues, “when you consider that the gold miners are far more profitable today. Profit margins are much higher.

“More importantly, these margins are likely to stay higher, since the cost of mining – diesel, steel, equipment, chemicals, labor, electricity, etc. – is not likely to rise at anywhere close to the rate at which gold bullion should rise. There is little chance we’ll see the same intensity of industrial activity worldwide over the next seven years as we saw over the past seven.”

Buying opportunities like this will be rare, Dan concludes, because many institutional investor portfolios remain underweight in gold. “These investors will keep looking to add exposure to gold because of the state of the private credit markets, government debts and central banks.”

Dave Gonigam
for The Daily Reckoning