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Message: Mining plays are a bargain!
Is there any doubt many mining plays have been the victim of relentless naked shorting. Interesting read. I do believe RHR will be moving back into double digits in the coming weeks. All the best, The Bluenote
Friday Chart Fun: Value Play Of The Decade
Dave In Denver
August 3, 2012
Before I get to the good stuff, I wanted to comment quickly on today's employment report released by the Government. As we all know by now, the NFP (non-farm payroll report) is one of the most highly politicized and statistically manipulated economic statistics on the planet. It's gotten to the point at which it's become absurd in extremis the degree to which so-called experts get in front of the public and discuss this report as if it has any meaning at all. In fact, the only meaning it represents to me is the outrageous degree to which the Government is willing to stretch the truth in an attempt to exert control over the public. Unfortunately, for the actual 20% of the population that is unemployed/under-employed, this monthly three-ring circus of Wall Street economists, CNBC and the Government has turned truly tragic.
Now on to the good stuff...A long-time colleague of mine sent me this chart which shows the ratio of the XAU mining stock index to the price of gold going back to 1984. I have not seen anything like this in blogosphere or posted on the usual gold-bug aggregator websites. The XAU index is composed of 16 of the largest gold/silver mining stocks traded on the NYSE/Nasdaq. If you are interested, here's the list: LINK The ratio itself represents the value of the index in relation to the price of an ounce of gold:
(click on the chart to enlarge)
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As you can see, despite the 11-year move in gold, which has taken gold from $250/oz to as high at $1900, the market value of mining stocks in general has declined in relation to the price of gold by extraordinary amount since its peak in 1996, when the price of gold averaged around $380/oz and silver around $4.80/oz. Does this make sense, especially given that the large mining companies have steadily increasing their dividend payout ratio and throwing off record amounts of cash flow?
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Either the market is pricing in the expectation of gold and silver selling off to the level where they started this bull market or the universe of mining stocks represents the value play of the decade.
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Barring some miracle bestowed upon us by some fantastically imagined divine intervention, the financial, economic and political problems faced by the world are going to continue to get worse. This would argue against a big drop in the price of gold/silver and in support of the value theme.
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The trigger for a massive inflow of capital into the mining stock sector will be the eventual discovery of this asset class by the large institutional funds - pensions, insurance companies, mutual funds, general-category money managers. As an asset class as a whole, institutional investors globally have less 1% of their asset base invested in the sector. At the peak in 1980, this allocation was over 6%. We're talking trillions in capital that will potentially flow into this sector, triggering a mania in mining assets that will at least rival, and likely exceed, the mania we saw in internet and tech stocks at the end of the last decade.
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So for instance, the total market cap of all publicly traded mining stocks (gold/silver) is roughly $200 billion. This is less than the individual market caps of the top 15 stocks in the S&P 500. Fidelity has a small dedicated mining stock fund that has about $2 billion in assets. But as an institution Fidelity has over $3 trillion under management. At some point, just like with the tech bubble, Fidelity will move a lot of capital across many of its funds into the gold/silver mining stock sector. Sheer investor demand will require it. This trend will sweep across all large asset management companies.
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I'm not going to try and put a timetable on when this investing shift will occur. But I will say that it is absolutely accurate to say that it's silly to discuss whether or not the precious metals sector is in some sort of "investment bubble" when most of the capital that could potentially flood into the sector and create a "bubble" has yet to do so. Have a great weekend.
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