Author: Jeff Clark

Here at Casey Research, we eagerly awaited the release of quarterly reports from the companies in our favorite sector. Why? The gold price was substantially higher last quarter than during the comparable meltdown quarter of 2008, so we were anxious to find out if it would lead to a spike in profits.

Gold and silver producers posted substantially higher net profits, and yes, much of it due to higher metals prices. But amazing to many, higher profits did not lead to higher – or at least not significantly higher – stock prices.

While most saw their stocks rise the day of their respective announcements, some actually fell if gold or the broader markets were down on the day. And they certainly didn’t jump like you might expect when “soaring profits” splashed the headlines of their press releases.

What gives?

We have some answers straight ahead, including a big fat clue as to when gold stocks will take off and give us those “magical” price levels we think are coming.

Gold Stocks Are Still Going to Take Off, Right?

We think that at some point the public is destined to participate in precious metals stocks, and when they do, we’ll see volumes jump and share prices take off.

But for now, gold stocks are playing follow the leader…

..rising and declining in tandem with the S&P since last April. So, until gold stocks separate from the overall market, we should anticipate they’ll tag along if the markets slide. And we think the path of least resistance for the stock market is down, not up, so caution is warranted about going overweight our stocks.

But just as we showed with gold last month, gold stocks will similarly propel higher when the general public crowds in, regardless of what the markets are doing. Here’s what gold stocks did in the last great bull market, compared to the S&P.

As measured by the Barron’s Gold Mining Index (a good substitute for the HUI that didn’t exist), gold stocks rose 652% during the 1970s (through January 1980), while the S&P returned a wimpy 22%. The action in the ’70s was definitely in gold and gold stocks, despite two recessions that decade, and we think a repeat is in the cards.

When the masses finally wake up, it’s highly probable our returns will match the chart above or the late ’90s surge in Internet stocks.

Is Now a Good Time to Buy?

As investors, our goal is to get positioned in the best stocks at the best price. And buying low assures us of more profit when we eventually sell. So, are gold stocks “low” right now?

We have a couple clues to help answer that, with gold itself offering the most important hint. Let’s compare how gold stocks are performing in relation to gold to see if they’re overvalued or undervalued or somewhere in between.

The chart shows that gold stocks, as measured by the HUI Gold Bugs Index, outperformed gold until 2008. Since then, gold stocks have underperformed gold by a fairly wide margin.

This gold-stock-to-gold ratio tells us that in our bull market, gold stocks are currently undervalued relative to the gold price. This doesn’t mean they can’t get cheaper, of course, but it does signal they represent good value and that compared to their underlying asset, there’s lots of room to the upside.

So, if you have a long-term perspective and the patience to wait until gold stocks begin outperforming gold again, today’s prices are good prices.

So, do we buy? The answer depends on your current exposure to gold stocks, how much gold and cash you have, and your outlook. If you own equities exceeding one-third of your total investable assets, we wouldn’t rush to buy. If you have limited (or no) exposure and a patient mindset to see you through until the big payday, even enduring temporarily lower prices along the way, then buying some now is probably a good move. If you have very little in the way of savings and gold, we’d put money there first before committing a big chunk to gold stocks.

Basically, the larger your stable of gold stocks, the more stubborn you should be about price. And we wouldn’t go “all in” just yet. Your risk in loading up now is if markets were to take another nosedive. But if you’re light on stocks, adding some of the best of the best at this time should work out well, as long as you don’t panic into selling on general market weakness.

Just Tell Me When!

The #1 indicator that will tell us when gold stocks will take off has nothing to do with charts and is something you can monitor yourself: it will be when your neighbors and co-workers begin to express curiosity. You obviously want to be invested before them, but that’s when things will start to get exciting.

So when might “gold fever” strike your neighbor? History holds the best clue:

In the 1970’s bull market, gold stocks began their big ascent when the gold price hit about $450/ounce. Adjusted for inflation, that would equal roughly $1,340 today. So, when we see gold rise decisively above $1,300 and stay there, that just might be the trigger that spurs the interest of the masses in gold stocks. That’s not a prediction, but it does give us an idea of what to look for.

Casey Research chief economist Bud Conrad was right when he called for gold breaking through the $1,150 barrier in 2009 – and now he’s calling for gold to break over $1,450 by year’s end. Weighing in as well, Doug Casey himself sees precious metals as the only asset class worth buying now, and gold stocks as being the best way to add speculative leverage to those investments.

Exciting? You bet. We’re convinced that, sooner or later, higher prices are ahead for the best gold- and silver-producing companies, along with the “magical” levels that can happen in a mania. So, while we encourage caution, we also encourage selective participation so you don’t get left behind. Waiting for the “perfect” time to buy is an exercise in self-deception; nobody can time the market.

Let’s be honest: no one can guarantee when or if a gold mania will happen. But all of our research points to higher prices for gold (and silver), so we remain confident we’re in the right sector. And we can make money before the mania gets here.

Jeff Clark
for The Daily Reckoning Australia

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(This is a guest post from Jeff Clark at Casey Research.)

The U.S. Mint just reported another record, but this time it wasn’t for gold. The Mint sold more Silver Eagles in March and in the first quarter of the year than ever before. A total of 9,023,500 American Silver Eagles were purchased in Q110, the highest amount since the coin debuted in 1986.

While this is certainly bullish, there’s something potentially more potent developing in the background. Namely, how this matches up with U.S. silver production. Like gold, the U.S. Mint only manufactures Eagles from domestic production. And U.S. mine production for silver is about 40 million ounces. In other words, we just reached the point where virtually all U.S. silver production is going toward the manufacturing of Silver Eagles.

Yikes.

This is especially explosive when you consider that roughly 40% of all silver is used for industrial applications, 30% for jewelry, 20% for photography and other uses, and only 5% or so for coins and medals.

To be sure, mine production is not the only source of silver. In 2009, approximately 52.9 million ounces were recovered from various sources of scrap. Further, the U.S. imported a net of about 112.5 million ounces last year. (Dependence on foreign oil? How about dependence on foreign silver!) So it’s not like there’s a worry there won’t be enough silver to produce the Eagle you want next month.

Still, why so much buying? The silver price ended the quarter up 15.5% from its February 4 low – but it was basically flat for the quarter, up a measly 1.9%. We tend to see buyers clamoring for product when the price takes off, so the jump in demand wasn’t due to screaming headlines about soaring prices.

I have a theory.

For some time, silver has been known as the “poor man’s gold.” Meaning, silver demand tends to increase when gold gets too “expensive.” The gold price has stubbornly stayed above $1,000 for over six months now and spent much of that time above $1,100. You’d be lucky to pay less than $1,200 right now for a one-ounce coin (after premiums), an amount most workers can’t pluck out of their back pocket. But Joe Sixpack just might grab a “twelve-pack” of silver.

What would perhaps lend evidence to my theory is if gold sales were down in the face of these higher silver sales.

The U.S. Mint reported a decline in gold bullion sales of 20.8% this past quarter vs. the same quarter in 2009. Further, other world mints have seen sharp declines in gold bullion coin sales as well: the Austrian Mint reported an 80% drop in sales for the first two months of the year and the Royal British Mint a 50% decline in gold coin production for the first quarter.

What’s even more dramatic is the difference in the dollar value of the sales. Gold Eagle sales in the U.S. dropped $10,263,500 from a year earlier – but silver sales increased by $61,855,290. So, not only did silver sales make up the drop in gold sales, they exceeded them by $51,591,790.

Is the rush into “poor man’s gold” underway?

Why the answer to that question is significant is that a shift toward silver for this reason could signal we’re inching closer to the greater masses getting involved in the precious metals arena. And that – for those of us who’ve been invested for awhile now – would be music to the ears. Because when they start getting involved, the mania will be underway, and from that point forward, it’s game on.

I’m not saying the mania is starting, and I actually think we could see another sell-off before things take off for good. Gold could dip to $1,000 and maybe even $950, with silver going to the $14-$15 range. But as clues like these begin to build up, we’ll know we’re getting closer. (And any drop to those ranges would clearly be a major buying opportunity.) Everyone talks about gold, myself included, but a meaningful portion of one’s precious metals portfolio should be devoted to silver. The market is tiny, making the price potentially explosive. Remember that in the ‘70s bull market gold advanced over 700%, but silver soared over 1,400%.

Don’t be a “poor man” by ignoring gold’s shiny cousin.

Read more at Casey Research –>

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(This guest post comes from Casey Research)

Many conventional U.S. brokers are relatively clueless when it comes to gold stocks. If you asked them to name one, chances are it would be a domestic producer, one with assets located primarily in North America. But that’s not where the big money will be made over the next decade.

To start, here’s something that will make you better informed than the typical traditional broker: take a look at where gold is currently being dug up around the world.

Tally it up, and North America accounts for only 16.3% of total global gold production. In other words, 83.7% of all the new gold every year comes from outside our continent.

Further, of the 15 largest gold deposits in the world, only five are in the U.S., Canada, or Mexico. Meaning, two-thirds are in regions where you don’t get cell phone coverage and the natives don’t speak your language.

The picture gets even sharper when you see the regions where production is increasing, vs. areas where it’s declining.

Several countries where gold has been traditionally mined, such as South Africa, Australia, and the U.S., are suffering production declines, while other areas, like China and South America, are just now starting to rev up.

In other words, not only is more gold being dug up outside our borders, more is being found there, too.

This has obvious implications for the gold stock investor who recognizes that the momentum is clearly behind the emerging countries. One geologist told me that some of these prospects are like Nevada was 100 years ago; wide open and full of gold deposits just waiting to be discovered.

Yes, there is risk, but the political winds are shifting in a more pro-mining direction here as well. In the U.S., for example, some members of Congress continue to promote a bill that could dramatically harm mining in the states, while China and many parts of South America are opening their doors to foreign companies. What would you rather invest in – a country trying to woo your investment dollars or one that is scheming to find new ways to take more of them away from you?

Gaia the Earth Goddess didn’t ask where we wanted our gold and silver deposited. And it is the underexplored – and in some cases the unexplored – regions that offer the most potential for new discoveries, greater production, and thus, higher investment returns.

Get more analysis at Casey’s Gold & Resource Report >

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See Also:

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• Gold’s Move Has Been PATHETIC