Inflation, deflation and a wild ride for gold stocks
We may be in the midst of a long bull market for gold, says this Canadian analyst, but be careful about buying junior gold stocks.
Where is the price of gold going?
Higher, almost certainly, one Vancouver analyst tells us. But there could be many twists and turns along the way.
"Not a big problem for long-term investors, but a pain for traders who don't know whether to hang on or step aside,” says Mr. Louis Paquette, the editor of Emerging Growth Stocks.
He is “fully convinced that I have no idea what the price of anything will do day to day or week to week for that matter."
So look well over the horizon to the long term, he says.
Gold is making a strong move above the $1,000 mark, to be sure. Yet sooner or later, this analyst says, deflation is going to turn into inflation and then we’ll have a whole new set of rules.
In the meantime, looking at recent history, he certainly doesn’t think it’s time to sell the gold stocks he has. But he’s not sure investors should be running out to buy junior gold stocks, either.
History does not repeat
In the seasonal patterns that descend on the markets, October is often a time when gold slumps. Typically, gold purchases tend to rise when the stock market is slumbering in summer, and then fall off in the autumn.
But history has not been repeating itself, says Mr. Paquette. In October 2007, gold soared in September, October and November. “Trying to be too cute would have had you leaving major profits on the table,” he says.
Last October, the price collapsed, along with everything else. Now it’s become difficult to follow the so-called “October dip” (which hasn’t happened so far this year).
Mr. Paquette is hanging on to his “core positions.” These include a stock we have run across fairly often of late in both Canadian and U.S. advisories — Newmont Mining (TSX-NMC; NYSE-NEM).
The analyst held this stock when it was Franco-Nevada Mining. And he has kept it since the Canadian firm merged with Australia’s Normandy Mining and Newmont Mining of Denver to form the behemoth it is today.
The 20-year bull market
“I hope to sell these closer to the end of the secular bull market,” he remarks almost casually. But that won’t be anytime soon. Far from it.
“In theory this could be around 2020,” Mr. Paquette explains. “Why then? Because gold tends to run up and down in 20-year secular bull and bear markets.”
This secular bull market started in 2001, so add 20 years and presto, you have 2020.
But we should “stop adding to positions when the bull market reaches the manic stages.” He estimates the starting point of the next leg of the gold bull market to have been $1,034 an ounce, and it’s well beyond that.
And it’s liable to reach even dizzier heights in the future.
Gazillions of dollars
Many are predicting higher inflation, Mr. Paquette says. But when?
It all has to do with credit creation, he figures. And it’s all up to the banks. “Yes, Central Banks are issuing gazillions of dollars to stimulate economies around the world.”
But the banks that are receiving all this manna are not turning around and lending it out. “They are using it to bolster their own capital reserves.”
Sooner or later, those reserves will be refilled and the banks will start lending again. At that point, interest rates will go up and inflation will be unleashed. Both the U.S. dollar and gold will start climbing again. It is only a matter of time before this happens, although Mr. Paquette wisely refrains from predicting exactly when this might be.
But he tells us to treat gold stocks with great care from here on out.
Everybody and their dog
This analyst has already “seen a few of these cycles before. A strong bull market turns into a mania — and everybody and their dog will be clamoring for stocks in that sector.”
In this case, it is gold stocks. And the good times will last for a while, the analyst admits. “But then the inevitable will happen: prices reach unsustainable heights and the mania will collapse upon itself, never to reach peak levels again — and those who got in late will have their heads handed to them.”
A man who keeps a close eye on junior gold stocks, Mr. Paquette admits he is tired of promoters coming to him with situations that have already appreciated from 4 to 10 per cent from their March lows.
That was the easy money. The next gains will be much harder.
Take the case of one stock he recently recommended, Otis Gold Corp. (TSX/V-OOO). The price had nearly doubled since it was picked in the August issue of Emerging Growth Stocks, hitting $0.80 briefly.
Several other newsletters had taken it up after this editor’s recommendation, which probably helped push up the price.
If it doubles again, he says, it might be prudent to sell half (it is currently at $0.74). On the other hand, holding some may be prudent if gold continues to rise, he says, or if the drilling program under way intersects the mother-load.
In fact, this morning Otis’s joint venture partner, Bayswater Uranium, has announced encouraging results from the Kilgore gold project in Idaho.
Nonetheless, caution is the order of the day, in this analyst’s opinion. “We can ride the stocks we already have, but to buy after the next leg starts will be dangerous.”
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