Weiss Research Columnist Tom Essaye
By Tom Essaye
Wednesday, June 6, 2012
One of the biggest events of last week was the May jobs report, which was a huge disappointment. Markets tanked on the release, with the Dow and Nasdaq giving up all their 2012 gains. Gold was the most logical winner …
It surged on the release of the data as traders assumed that the weak jobs number means a higher probability of additional QE from the Fed and other global central banks. And more QE will stoke inflation’s flames. The primary beneficiary: Gold!
As a contrarian investor, though, I always try to look beyond the obvious winner of an event such as the jobs number. I want to find the not so obvious winner from something like additional QE. And I think gold mining stocks may actually be a bigger beneficiary than gold bullion.
More often than not, I wouldn’t make such a case. Having traded and invested in gold mining stocks for a number of years, I can say from experience they are one of the most frustrating sectors of the market. And up until a few weeks ago, this year has been no exception.
But in mid-May, as gold made a bottom around the $1,530 level, gold stocks all of a sudden started rising, despite a falling stock market — something that rarely happens. The reason for the rally wasn’t totally clear. But I believe gold stocks simply got too cheap. Many were trading at or below book value, which is a rock bottom valuation. Additionally, if gold prices were turning upward, then …
Gold Mining Shares Had Become
One of the Best Values in the Market
I’ve often said that as a contrarian investor, you have to realize that everything has a value at some point. And I think the tremendous decline we saw in gold stocks finally created that opportunity.
Normally, it would take more than just this technical bounce to get me bullish on gold stocks. But if we step back and
Investing in mining stocks is likely to provide a higher return than just owning gold.
look at the landscape for the miners, we can see that there is the possibility for substantial gains …
First of all, we’ve seen fuel costs (particularly oil) fall precipitously. As energy and fuel costs fall, gold miners’ margins rise because it becomes less expensive for them to extract and transport the gold.
Second, with the creation of the SPDR Gold Trust ETF (GLD) and other gold ETFs, gold companies have had to become better stewards of corporate capital. And as such, some major gold miners have started paying dividends and adopting other shareholder-friendly measures.
So while gold will certainly benefit from any additional easing or QE that the Fed or other central banks might do, I think the time could be right to look to gold mining companies as well, which can provide a return greater than just the rise in the price of gold.
One idea you might check out is the Market Vectors Gold Mining ETF (GDX). However, if you want to shoot for the really big gains, consider stocks in miners that Wall Street isn’t watching. Timing of course is everything. And I’m looking to scoop up a select few on a pull back for Martin’s Million-Dollar Contrarian Portfolio.
Best,
Tom
