Is This the Death of Gold & Silver Stocks? Part II

When I wrote Part I and sent it off for posting, I didn't realize that the Wall Street Journal's "Heard on the Street" column was going to help advance my proposition.

In this article titled, "Miner's Run Seems Over" (which is another way of saying "Mining Stocks are Dead") someone named Arindam Nag was adding to the pessimism and negativism about mining stocks (forgive the pun, but he or she was "Nagging").

The WSJ article had this kind of sour-grapes flavor to it:

Put away that shovel. Mining stocks are getting hurt as investors anticipate a profit squeeze between rising investment costs and falling commodities prices.

The DJ Basic Resources STOXX index, which includes some of the world's main metals companies, including BHP Billiton (BHP) and Rio Tinto (RTP), is down 26% in the past three months.

That has left commodities companies trading at historically low multiples of expected earnings, suggesting either the shares are undervalued or investors believe miners' run of profit growth can't continue.

The latter looks most likely. Even if commodities prices don't fall further, rising costs could be enough to squeeze...

So, as if the Nag knew what investors were thinking and doing (many of them are on vacation I'm told), he/she announces to the world that "they", the investors, believe it's curtains for the mining companies' "run of profit growth."

They weren't the only one throwing cold water on the miners. Our friend Dan Ferris who pens the illuminating newsletter Extreme Value at Stansberry Research was opining about the shortage of both silver and gold coins, when he decided to weigh in on the Mining Stocks and their impending "funeral."

Dan writes, "We received this note yesterday from our own Matt Badiali:

Just got off the phone with Van Simmons (an executive with David Hall Rare Coins). He said there is a shortage of both Silver Eagle coins and 100-ounce bars. He can't get them. He said that, for the first time in his career, a supplier that guaranteed delivery simply couldn't make good on the promise. He also told me that platinum eagles are in serious short supply. I guess that means someone out there is buying up the physical metal in a big way.

The U.S. Mint has run out of one-ounce American Eagle gold coins. And it's been rationing Silver Eagles because of the high demand.

The U.S. mint sold 60,000 one-ounce gold coins this month, up from 47,000 in July and 13,000 in June. When gold fell from the $900s to the $700s, small buyers didn't sell, the way they usually do. They bought.

Abraham Lincoln may have been an even worse president than FDR, but he had one thing right: You can't fool all of the people all of the time. People know the government is destroying their currency, so they're turning it in for gold, which is exactly the right thing to do.

So if gold coins are dear, why are mining stocks so cheap? For one thing, cost pressures are hitting the miners. A Lehman Brothers analyst says inflation accounts for half the increase in the capital spending of mining giant Rio Tinto from 2003 to 2006.

Most people view mining stocks as inflation hedges. But at some point, it becomes illogical to view a highly capital-intensive business that way. Sure, at first, it seems like it's just too expensive to build a new mine or refinery. And that gives existing facilities an advantage.

But over time, given persistent inflation, running those existing facilities will cost more and more. The more it costs to run the existing ones, the more it seems to make sense to build new ones. And the cost increases aren't necessarily passed on. Mining companies don't have any pricing power over their goods. They sell products whose prices are set on the open market, minute by minute, at the whim of the herd.

The only real consistent inflation beater, aside from holding gold coins, is to buy companies like Procter & Gamble (PG), Altria (MO), Philip Morris International (PM), Coca-Cola (KO), and UPS (guess what their symbol is).

In good times and bad, these companies are acquired by knowledgeable corporate buyers at around 30 times earnings. As were Gillette, Wrigley, and Anheuser-Busch.

So my friends and fellow investors, what would you rather own: UPS (UPS), Coca-Cola, or Goldcorp (GG)? This conundrum is going to play itself out over the days and weeks ahead, and it might lead to some "capitulation selling" among mining stocks.

This is just the kind of negativity and hopelessness that can set up a market or a sector for a very nice reversal, surprising all but the most visionary and prudent investors.

Would you be tempted to buy BHP if it were down around $63 again? Would you be willing to consider Silver Standard Resources (SSRI) if it were selling closer to $20-a-share?

You might just get that chance (and then again, you might not). If enough people begin to believe and spread the gossip that the "Miner's Run Seems Over" there could be a short but nasty selling spree among the most heralded names among them.

My suggestion is to begin to create a "shopping list" of the best-of-breed miners and producers that you want to own or add to your holdings, and be ready to pounce on them if this "fire sale" were to ensue...unless you're one who believes in "The Death of Gold & Silver Stocks" and the end of the gold and silver bull market.

If that's the case, Proctor & Gamble and the Marlboro Man at Phillip Morris International await your investment dollars.

Disclosure: Long GG, GLD, SSRI.

Comments

[GMiki]

I'd rather own GG. :) Gold has moved steadily up this week. Next week? No one can time the market. The only thing everyone can say is gold and silver are on the rise. If not, some mines will close and gold and silver will be on the rise.

I read one or two words of Paul and Shark's comments and found them incomprehensible.

[Whidbey]

It is interesting that the conspiracy involving money, including gold, is so extensive. The fear of the dollar is in a fade for a time, but one must suspect it is all relative to the EU problems. That will not hold over the longer run as the Internal problems grow. The PM remain the last best defense against governmental foolish which is just rampant.

[GMiki]

Paul/Shark,

Whoah! Nasty and personal.

I've held gold since well under $300. I bought more a few years ago at $400, and I don't buy on margin. I'll sell my $7 silver if I need anything, thanks. Might you be in denial and afraid? Or paid by some entity to talk down gold? Miki Mouse

[Engineer]

Good article Mark,

I must also admit I am somewhat mystified by all this talk of the juniors collapsing. Collapse from what? You can find good adequately capitalized juniors now for a lower "metal in the ground" price than you could in 2003!

[User 252509]

Miki,another 5 minutes GC is 825$ I think you better run sell your Eagle,loser.Or better you shut up this is big boys games,I made today 3500$ on sellong Palladium at 299$ that I bought at 292$ before yesterda and another 2000$ selling Crude Oil,my 10000$ loss on Crude became profit.5500$ up today and looking forward for my DOW JONES shorts as market will crash and I will cash my chips (8 mini Dow short).Markets must crash as there are too many pikers we must take money from.

[JBP]

So, is Paul/Shark and 252509 the same person I guess? Tell us what your new positions are today so all of us idiots will learn from the self-proclaimed master of the markets. Funny how you lose your temper if someone disagrees with your short position on gold.... Motives maybe???

[chux08]

"Would you be tempted to buy BHP if it were down around $63 again? Would you be willing to consider Silver Standard Resources (SSRI) if it were selling closer to $20-a-share?

You might just get that chance (and then again, you might not). If enough people begin to believe and spread the gossip that the "Miner's Run Seems Over" there could be a short but nasty selling spree among the most heralded names among them."


Oh...baby, I CAN HARDLY WAIT!!! Bargains await...and when I have some $$ too. I've said my prayers and I've been a GOOD BOY. It looks like Santa's coming early. Hope YOU're ready!!

[bowman711]

My belief is that when someone has to tell you how well he had done, he is almost certainly not doing all that well. There are many investors who comment on these SeekingAlpha articles who never say how well they've done, but who give good reasoning for WHAT they have done. It is they whom you should read and learn from.

Skip over reading the 'Paul & Sharks and CLHs (Does CLH stand for 'Curmudgeon & Lunatic Here'?) and learn from the real experts and successful investors.

[Marc Courtenay]

Wish more of you would weigh in on your favorite gold and silver stocks, seniors, mid-tiers and juniors. It would be helpful to know which ones are on your "wish list" too.
The Seeking Alpha community can be very constructive if we allow it to be and if we stay focused on sharing ideas, concepts and useful suggestions. I hope my articles will spawn more mutually enriching investment themes and insights. Thanks for being a reader and for contributing your comments. Good fortune to each of you, Marc

[Inzight]

I like KGC, GG, US Gold (ex GG CEO), MAI (30% owned by GG CEO McEwan), and Argentinean juniors like TNR.v which has ties with Barrick (10% share), NovaGold, and BHP billiton.

Not too many juniors out there like that, they also have 25% on MAI's copper mine, can you say ka-ching?

[GMiki]

Bravo Gold and Impact Silver, Sabina Silver--GG, of course. Pelangio, which is splitting itself to try to maximize its Detour Lake plus Ghana holdings. ANO for platinum, which has been under siege. Bayswater for uranium. Dejour for a nat gas junior, Kodiak, and Dune.

[Clavis]

Marc, I do like your comment.
Is there a moral question as to where you should invest?
Is it all about making money?
We have the current moral example of the Kinross attempted take-over of Aurelian; the biggest gold find in the last twenty year: (see agoracom.com ARU) where the shareholder are likely to end up with $5 + worthless warrants instead of $20+ per share due to the greed of the ARU management who have sold their retail shareholders down the river.
Gold is about to take off, do I invest in this market or do I try and support miners producing a more worthwhile product.
Shorting, leverage, margin accounts; do you know who is using your shares for what purpose?; naked shorts etc. have brought us to the fine mess that we are in today.

[camquin]

I'm just getting started so right now own my wish list is GDX. I think GLD gets a lot of hype but see GDX as a solid investment as well. Gold stocks are trading near historical real lows so I thought it would make sense to get in now, especially after the bumps we experienced in the past month or so.

[Marc Courtenay]

Thanks for your responses and the "wish list" ideas.
Clavis, if what you are saying is to invest with your conscience, I couldn't agree more. For instance, some of my close friends will only own the hard, physical precious metals (coins, bars kept in safe storage) and are morally opposed to buying the mining stocks. I'd prefer not to be judgmental about it and instead to encourage a sense of personal, moral conviction about how we invest our money.
Camquin, thanks for the connection to Jim Welsh's article. One of the things he said really resonated with me;
"The short term could prove tricky though, since the Dollar may have one more push above last week's high. If this develops, I would expect the Euro, Gold, and oil to make one more new low beneath their lows last week, before a solid rebound begins."
This is entirely possible and that's why it is smart to keep some cash available for that opportunity if it arises. GDX is a smart way to diversify among the big producers, but it might not have the same upside results as two or three carefully chosen, financially sound companies.
Buying some now makes sense, and being ready for a retest of the lows and a chance to buy more at lower prices also makes sense. I wish all of you a happy labor day weekend, good investment results, and most of all, peace of mind. Regards, Marc

[Alan von Altendorf]

Marc, I like Ivanhoe Mines (IVN) in Mongolia as a speculative bet. Solid scientific and technical team. Huge resource.

[Delta]

I am buying RBY, the neighbor at Red Lake is GG. The 43-101 on gold drilling results are amazing for a company flying under the radar.

[Kunst]

"Abraham Lincoln may have been an even worse president than FDR"

Wow, that's a new one! And where do you put Washington?

[fxtrader07]

this bragging by silly daytraders about their alleged profits is annoying, to say the least. Don't know why these spammers have to deposit their nonsense right here as commentaries to an article they never bothered to understand and never will understand.
I agree with the author but I may add that owning physical silver should be another top priority for longterm investors. It may or may not pay off tomorrow or next year or even in five years. but in 10 or 20 its will feel like looking back from 1980 after buying gold at 35$ in 1970

[fuzzywzhe]

To Kunst:

Abraham Lincoln's SOLE aim was to keep the South from withdrawing from the Union - something they were entirely entitled to do.

Abraham Lincoln initially supported a failed 13th amendment which would have guaranteed the right of the southern states to permanently allow slavery. This was the Crittendon Compromise. Lincoln in his inaugural address said he would support it.

Read his inaugural address:

www.bartleby.com/124/p...

He is *not* the man we were taught about. He put newspaper editors in jail for writing articles critical of him. He was a damned fascist although, after killing more Americans ever killed in a war through a Civil War, he did manage to eliminate slavery.

You don't learn anything in school about history, you learn propaganda.

[Kunst]

fuzzywzhe,

Thanks for the history lesson. It took me a while to learn that all the US history I was taught in school was propaganda, and that we are no more perfect a country or people than any other.

That said, 1861 was a different time and he was dealing with the situation at the time from the perspectives of that time. I still think he will continue to be ranked as one of our best presidents despite any imperfections. And I disagree that the south was entitled to secede unilaterally, especially to preserve the evil of slavery.