Gold stocks may outperform gold bullion - Don Coxe

Don Coxe says there's no big reason why gold's outperformance should be over, and even could correct to a little bit below $1,000/oz without ending its bull market.

Author: Dorothy Kosich
Posted: Tuesday , 22 Dec 2009

RENO, NV -

Changing the price of gold should really change what should be the valuation of gold mining stocks, investment advisor and commodities analyst Don Coxe suggests.

In a recent Basic Points analysis, Coxe, longtime strategy advisor to BMO Capital Markets, called gold "the best performing major commodity since the financial crisis began."

"We see no big reason why that outperformance should be over," he advised, adding that after its breathless run, "it's entitled to correct back to $1,000-or even a bit below that chiliastic level-without ending its bull market."

However, Coxe advises that investors remain overweight in commodity stocks within balanced and equity only accounts. More emphatically, Coxe believes gold stocks should be emphasized in commodity stock accounts.

"Gold and other precious metals appear to have entered a period of above-average volatility, but the unprecedented creation of paper money and national debts means ownership of the metals and producers will tend to reduce endogenous risks in most portfolios," he noted.

"The stocks will tend to outperform bullion on the upside; the bullion will outperform on the downside," Coxe predicted.

In a recent conference call with investors, Coxe declared, "Our thesis is that notwithstanding the fact that we've had this pullback in gold prices, that the value of gold stock should be higher, and therefore we are sticking with our view that you need to have about one-third of your commodities exposure tied into precious metals which are driven by the price of gold, whichever precious metal it is, they are consensually priced off the relationship with gold."

He asserted "there has got to be a lot of rethinking by investors out there, about the interaction between this continued buildup of foreign exchange reserves and what this could mean for gold, if they are going to have anything more than a token percentage of their foreign exchange reserves in gold."

Coxe predicted "more and more countries are going to decide that they have to have a meaningful commitment to gold in their forex reserves."

"They'll be cautious about how they do this and they certainly wouldn't go into buying it at $1200 an ounce, but pullbacks will probably constitute buying opportunities for those central banks to just strengthen their forex reserves a tad here and there, and given the small size of freely traded gold relative to foreign exchange reserves, it doesn't take much to move it," he explained.

Nevertheless, Coxe cautioned, "I am not predicting a parabolic rise in gold. I am simply stating that the fundamentals for it are changing because it was in the position before that you had the central banks who had nearly all the gold that we knew about (that wasn't in the form of jewelry), who were selling it as fast as they could and they were held back only by the Washington Agreement."

Coxe is now the chairman of the COXE Commodity Strategy Fund. For more information, go to https://www.bmocm.com/investorsolutions/coxecommodity.aspx?pro=CEF&class=COXE_Commodity_Strategy_Fund