By Ellsworth Dickson
In a recent report by Sprott CEO Peter Grosskopf, he said that Sprott analysts believe that today’s gold mining share prices provide investors with excellent opportunities for Yuletide purchases; however, it is not particularly easy.
He notes that there could be illiquid problems due to the fact that Sprott estimates that the aggregate market capitalization of the world’s top precious metals miners and royalty companies is approximately US$300 billion. This means that the small size of the market is not enough to “sustain the attention or volume requirements of the world’s larger asset managers.” Grosskopf said that the “aggregate value of the up and coming gold miners is so small that position sizes become illiquid even for smaller investors.”
He writes that the volatility of gold stocks tends to attract short-term market timers. “This volatility ties directly into the need for the disciplined allocation to purchases,” he said.
However, the volatility creates extraordinary buying opportunities with pullbacks taking place for various reasons.
Reviewing basics, Grosskopf said that the gold price is primarily driven by three numerical factors: the money supply (M2), the U.S. dollar (DXY Index) and real interest rates (10 year TIPs yield). He commented that gold’s most important historical determinant is that it reacts inversely to investor confidence.
“We believe the market conditions for gold are currently favorable, largely driven by the voracious need for fiat money supply growth and its increasingly direct correlation with all financial markets,” said Grosskopf.
Don’t discount technical analysis as it can “provide valuable clues to when the contrarian timing for mining equities is right.” Mining financier and investor Eric Sprott is of the view that moves of more than 20% from a pullback indicate that the coast was clear.
Grosskopf said that he watches relative strength indicators closely because extreme readings are usually predictive of reverse moves. Both the technicals and the fundamentals remain strong,” he said. “Gold equities are very cheap relative to broader equities.”
An encouraging fact for gold stock investors is that since the beginning of 2019, the S&P 500’s earnings estimates have dropped by more than 18%, while the earnings per share for gold miners have risen by more than 186%.
Grosskopf said that many high-quality gold equities have corrected into attractive valuation territory. He particularly likes gold producers with a proven culture and expertise in building large complex mines and then operating them well. An added bonus would be those with high quality acquisition targets.