Gold Mining Stocks

This is a subject I have wanted to bring up for several months. I discuss it today because I made a new purchase which I need to report to you. The current correction in gold may be creating one of the best opportunities we will have during this entire secular commodity bull market. It is the opportunity to buy gold mining shares at a fraction of their potential value.

Here’s the story. During every bull market in gold, there comes a time when the public is attracted to gold mining stocks. Because of their high leverage to the price of gold, and their incredibly short supply of shares, the new buyers bid the prices up by multiples. I will never forget what this was like during the 1970-1980 gold bull market. Many gold stocks went up ten or twenty times in price, some fifty times and some a hundred times in a two to five year period of time. I owned one stock that I sold at fifty times my cost.

The experts I have confidence in tell me that the public is barely aware of, and barely invested in, physical gold and silver. Far more important is the fact that gold mining stocks are completely off the radar screen of the public. That is the makings of a really good opportunity. A casual look at the charts of a dozen or so gold stocks will verify this. Every time the stock market as a whole goes down, or gold goes down, these stocks fall like a rock. Although gold is more than three times its low of seven years ago, most of the gold stocks are down from their highs of the last seven years.

Let me begin with the one gold stock I own now, Vista Gold (VGZ). The reason I own it is because Maybury recommended it a few months ago, calling it his favorite speculation at that time. That’s all I needed to hear to know that I wanted a position in it. In the short time I have owned it the market value of my investment has declined 14%. That’s not unusual for Maybury’s speculations. The only reason I mention it is that I learned something this week which encouraged me. A well-recognized and respected gold stock analyst recommended Vista a year or so ago. In his recent newsletter, he commented that the company was on a slow development path, saying further that it might do well, but not soon, and he preferred to replace it with another company. That comment was published at the exact same time that the stock took another step down in price. That made me want it all the more, because as Maybury pointed out when he recommended it, the company is only acquiring mineral interests, and is not mining them yet, preferring to let the gold in the ground increase in value while the company saves the huge mining costs in the meantime. For further perspective, Vista’s high over the last 10 years was 14 (in 2006). Currently it is selling near 4, down 70% from its high. I like its potential and will probably add to my investment.

Before I tell you about the stock I purchased today, and show you the chart, let me mention some things that should be clearly understood before one invests in gold mining stocks. First, they are speculations. They are part of the Variable Portfolio if you are using Harry Browne’s Permanent Portfolio concept. Thus, you should strictly limit your investment to an amount you are willing to subject to high risk. Furthermore, you should buy at least four different companies because any one could become worthless. There is an alternative to buying several different stocks. That is USERX (U. S. Global Gold and Precious Metals Fund). This fund is managed by one of the best gold stock analysts in the world, Frank Holmes. This is the safest way to participate, but likely would reduce the potential gain somewhat.  I plan to invest in USERX soon.

Second, although this looks to me like one of the best opportunities of the commodity bull market, there is no guarantee it will materialize. Third, there may be short term risk in this investment even if it works out long term. Study the gold chart in Letter 24, and you will realize the current correction in gold could take its price below 800, and the correction could last for two years or longer. Either event would probably knock gold stocks down significantly further. If so, I would consider them an even better buy. I mention this to caution against getting in a hurry. Eventually I hope to have at least 10% of my portfolio in gold stocks, but I’m not in a hurry to get there.

SEABRIDGE GOLD (Symbol SA)
Today I purchased an initial very small position in Seabridge Gold (symbol SA).  I learned about this stock from one of the experts mentioned in Letter 3, Steve Sjuggerud.  I am a subscriber to his newsletter, True Wealth. Steve recommended the stock on June 15, 2007 at $17.48. It subsequently rose to a high near 40 in late 2007, and has declined to 20 recently, down almost 50% from its high. Steve has done a lot of research on this company, and his recent comments, as well as the big drop in price, have attracted me to this investment. I quote from the May issue of True Wealth, page 6, “Seabride is interesting now. Its drilling program has been an enormous success. It has increased its gold resources to 50 million ounces. With some simple math, at $1,000 an ounce, that’s $50 billion worth of gold in the ground. It also has more than 8 billion pounds of copper … at current prices, that’s $32 billion worth of copper – for a total of around $80 billion worth of metal in the ground. Seabridge has a market cap of $750 million today. So in essence, at current prices, Seabridge is selling for about $15 per ounce of gold in the ground!”

Take a look at the chart of Seabridge.

Note how well the 200-day moving average has defined the bull market since 2005. At Friday’s closing price of $20.55, SA is 26% below its 200-day moving average. Unless the bull market is over, that strikes me as a great value. I close with a comment from another analyst for whom I have great respect, Fred Hickey, “Just wait until the public gets comfortable enough to start buying gold stocks (which are deeply depressed relative to the move up in gold’s price).”