Gold Stocks and the Fear Factor

The focus of today’s column is gold, particularly the environment that makes gold stocks, gold ETFs and even gold bullion attractive to investors. For some readers, the highlight will be the 10 gold stocks I discuss farther below. 

But first, I need to mention that today marked the 120th running of the Boston Marathon, an event that’s a big deal in this state, even among non-runners. In fact, it’s a big reason that Patriot’s Day is a public holiday in Massachusetts. I don’t get the day off; I’ve always worked because the stock market’s open. But I do have a habit of taking a long lunch so I can watch the finish on TV with my wife. And today’s finish was as good as any!

Winners Lemi Bernahu Hayle and Atsede Baysa won gold medals—as well as $150,000 cash—and all parties involved were able to gain a little more distance from the horrors of 2013, when two bombs exploded near the finish line, killing three spectators and injuring 264 others.

Those bombings marked the start of a four-day manhunt that led to the death of one of the perpetrators and the capture and imprisonment of the other—who was eventually brought to trial and sentenced to death.

Equally important, the bombings served as one more incident—in a long line of incidents—that served to escalate the perception of the threat of terrorism in the minds of ordinary Americans, and led, over time, to such standard practices as school drills to prepare for terrorism.

To date, untold tens of thousands (maybe millions) of American schoolchildren have been through exercises designed to prepare them for dealing with terrorist threats at school, from live shooters to kidnappers to bombs.

And what have we reaped from this “preparation?” Ignoring the lost educational time, the two main products of this effort appear to be an increase in school bomb threats (on Monday and Thursday of last week, dozens of Massachusetts schools received bomb threat robo-calls through an anonymous online network), and an increase in the level of fear experienced by Americans of all ages!

Eighty-three years ago, Franklin D. Roosevelt delivered his first inaugural address in the depths of the Great Depression, said, “The only thing we have to fear is fear itself.” But now, school authorities, while trying to make children’s lives safer, are actually (unintentionally) teaching students to be afraid of terrorism, even though the individual risk of danger is infinitesimally small.

Thus perception of the threat is increased astronomically, even though the real risk is (relatively) minor. When it comes to terrorism (as with many other threats), I think education based in reality should be key.

On the other hand, as I’ve told my readers many times, when it comes to investing, perception is key, because it’s investors’ perceptions that move stocks. And when fear is elevated in the market, it’s perfectly reasonable to work to profit from that fear by investing in (or shorting) the stocks affected by it.

Which—finally—brings me to gold.

Gold Stocks and the Fear Factor

I’ve never been a big fan of investing in gold. Unlike most companies, which use intellectual capital to create value-added products and services, gold miners add no value to their product. Once it’s out of the ground, it’s generally indistinguishable from all the other gold around the world, and the only thing that will make it more valuable is a change in the perceptions of people regarding any of the levers that affect the price of gold.

And what are these levers?

• Global gold supply

• Global demand for gold jewelry

• Global industrial demand for gold

• The level and trend of interest rates

• The level and trend of the U.S. dollar and other currencies

• The rate of inflation

• The national debt and annual budget deficit

• The level and trend of the global money supply

• The level and trend of global central bank gold reserves

• And—overshadowing everything else—investors’ confidence that the modern global economy will continue to expand without major disruptions.

So, here’s a chart of the price of gold over the past year

And here’s a chart of the Market Vectors Gold Miners ETF (GDX), which has rallied with all stocks in recent months and remains quite strong.

Why is Gold Strong?

Why is gold strong? Likely factors include the rebound in commodity prices, the weakening dollar and the fear of central banks printing money that is not backed by real assets.

But I think a major unappreciated factor is the growing uncertainty about the U.S. Presidential election, an uncertainty that for many people has escalated to fear, as they imagine how bad the situation might get if the person they least respect gets elected.

Or, leading up to that, if the actions of the delegates in the party conventions are so disrespectful of the primary voters’ choices that citizens’ discontent—even anger—dwarfs the anger that accompanied the Bush vs. Gore chad-counting fiasco of 2000.

From my perspective, it’s a fear that could easily grow from here, and for this reason, plus the fact that I trust charts implicitly, I did a little digging into gold stocks, looking at both the five most attractive from a growth perspective and the five most heavily traded.

The five growthiest gold miners (from both a fundamental and technical perspective) are:

Vista Gold Corp. (VGZ) (the low price alone would scare me away)

Coeur Mining (CDE)

Klondex Mines (KLDX)

Tahoe Resources (TAHO)

Pretium Resources (PVG)

To date, none of these five gold stocks has been recommended by a Cabot analyst, and it’s entirely possible that none ever will be. Some are thinly traded, and one has not actually mined any gold yet. Still, I’ll be keeping an eye on them, and if this gold rally continues to gather momentum—and the political situation in America continues to feed investors’ fears—who knows?

The five most heavily traded gold mining stocks are: 

Barrick Gold (ABX)

Newmont Mining (NEM)

Goldcorp (GG)

Agnico Eagle Mines (AEM)

Rangold Resources (GOLD)

These are the stocks that institutional investors buy when they want to own gold stocks; the higher quality brings you less risk at the cost of less profit potential. If you’re a beginner and interested in getting into gold, all five stocks are worth a look.

But if you don’t want to take the time to research them yourself, your best course is to read last week’s issue of Cabot Top Ten Trader, which recommended one of them—and told readers exactly where to buy it. For more information on how you can get all the details, click here. 

Timothy Lutts

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