Soros back in gold buying mode, Gartman positive on gold and gold stocks

With a heavy hitter like George Soros back buying gold, and gold and gold stock positive comment from the strongly followed Dennis Gartman, the sector has been seeing some new life.

Author: Lawrence Williams
Posted: Thursday , 07 Jun 2012

LONDON -

According to SEC filings George Soros has been back buying gold - and this on its own has probably given a lift to the gold price, with many big money investors likely to see that as a lead to follow. Soros famously described gold as being the ‘ultimate bubble' a year or so ago, although the quote was largely taken out of context. He was also said to have sold a large proportion of his gold holdings last year, but is now seen as climbing back in with substantial purchases in the SPDR Gold ETF in the first quarter.

Meanwhile BMO adviser Don Coxe who has a very strong following, mostly among the gold adherents, reckons some of the recent rise in gold stocks in particular could be put down to the Dennis Gartman effect. Gartman, like Soros, is not a gold bug and his Gartman letter has a huge following so when he says he feels gold stocks are seriously undervalued vis-a-vis the gold price, investors listen. Gartman is a little more circumspect on gold bullion though as can be read, or heard, in his recent Mineweb podcast: Why gold isn't a safe harbour and why it could still go up - Gartman he suggests that investment in gold is speculative, but that there is still upside to be seen - "I think I've said this before on your programme, and I'll say it again, I am not a gold bug. I don't believe that gold is the be-all and end-all - I don't believe the world is coming to an end. I don't believe that all fiat currencies are going down the drain in one effective flush, I don't believe that. What I do think, however, is that gold as I like to aver, is moving from the lower left to the upper right on the charts and is doing so with some sense of consistency over the past six years" he said. That to Gartman followers is about as bullish as he can get on gold and is taken as a strong investment signal in favour of gold, and in silver if not necessarily in pgms..

Certainly, since Gartman's comments in various media on gold stocks of late, the better gold stocks themselves have seen a strong pick-up despite a weak gold price over most of the period. Coxe notes that while increases in the gold price over the past month have been modest, the S&P TSX global gold index has risen around 25% bucking the recent trend which has seen gold stocks hugely underperforming the metal price. (This index doesn't include some of the more speculative junior gold explorers though which have seen their stock prices decimated). While many commentators, as will have been seen in articles on Mineweb have for some time been pointing to this disconnect as a gold stock buying opportunity it has only been since Gartman joined the chorus that this recent upwards movement has actually happened. That, according to Coxe, is the ‘Gartman effect'.

Gartman reckons though that the trials and tribulations within the Eurozone will have to come to a head and be resolved one way or the other in the next few months. It just can't drag on. He sees even a softish resolution to the Eurozone crisis as being positive for gold in the medium term and that gold will, regardless, prove to be a better investment over this period than stocks or commodities. But he doesn't see gold being reclassified at a Tier 1 banking asset under Basel 3. If that were to happen though he sees the gold price rising dramatically on the news.

But its not just gold stocks which have been underperforming over the past couple of years. In the foreword to the document released on Wednesday this week, Mine: The growing disconnect, PwC Global Mining Leader Tim Goldsmith and PwC Mine Project Leader Stuart Absolom noted the top 40 mining companies posted record profits of $133 billion, generated record operating cash flows of $174 billion, returned 156% more to shareholders, and yet market capitalization fell by 25% last year. (see Disconnect between mining companies, shareholders is multiplying-PwC). Gold companies have actually done marginally better in some instances but this too could be down to the recent surge. So it may be no comfort to the gold investor, but other mining sectors have done just as badly. Mining stocks do seem to have fallen out of favour with the investment public and surely are due for a rerating?

While the Eurozone crisis comes to ahead the global banking sector is shivering in its shoes. Widespread bank collapses in Greece and Spain, should they occur, would spread far and wide given the global interconnections in the system. In a way it is puzzling that the ongoing Euro crisis has not been more positive for gold - but the effect has largely been mitigated by dollar strength so while gold may have remained stable, or even risen, in many currencies, it had fallen back in the dollar. Friday's move upwards to an extent broke that trend, but uncertainty on the global economy makes market moves in stocks, commodities, and gold very difficult to predict. Logically gold should benefit - presumably the view taken by mega-investors like Soros, but other factors - notably liquidity - start coming into play as other sectors are squeezed.