A forecast for the next decade and the gold stocks to go with it
In the midst of a confusing market there will be a bull market in gold, says this Canadian analyst, who recommends a portfolio of gold stocks.
Another year is about to stumble into history.
As promised, we have a year-end preview for Canadian investors.
Dividing everything into calendar years often seems arbitrary. Indeed, you could make the case that for investors, 2009 began in March when stock markets started to pull themselves back up from their lows.
On the other hand, 12-month cycles are a useful way of framing events (and of course the tax year never varies, as Canada Revenue will be happy to remind you).
Plus there’s an almost irresistible attraction to looking ahead in time. So why scrimp? Instead of forecasting just one year, let’s do ten.
Our guide is a veteran observer of Canadian markets, Mr. Carlyle Dunbar. In his regular column in Investor's Digest of Canada he turns his gaze on the decade of the 2010s.
He also has a full portfolio of gold stocks to recommend for his readers, which will give you some idea of where he’s heading.
No burst bubbles
There’s a lot of talk about bubbles, Mr. Dunbar remarks, be it gold or bond bubbles, or even just the stock market surge of 2009. “What we should expect from it, though, is more froth than burst bubble,” he says.
The events of the past two years haven’t made it any easier to forecast the future, this analyst adds. After the massive disruptions of the credit crisis, almost any prediction for 2010 could go wrong. There could be another financial collapse, a stunning recovery, or something in between.
But there is at least some reason to believe that the outlook is better than the market crash of 2008-09 might suggest, Mr. Dunbar estimates.
An extended sideways trend
There are three things to keep in mind. First, the stock market does anticipate the future. Canadian markets are up more than 50 per cent from their lows this year, and the S&P 500 is up more than 60 per cent. As an investor, says Mr. Dunbar, “you cannot ignore the bullish implication of this,” even in the face of worldwide recession.
The economic and financial problems we face are not going away, he adds. There are too many legislative and tax burdens on business for that. They may “linger like an ulcer,” but another big collapse is not likely.
The market was poised to go one of two ways — into a deep, quick cleansing crash, or an extended sideways trend, lasting for years. Now it looks like the latter will prevail.
“The next decade,” says Mr. Dunbar, “will resemble the 1930s, the 1950s or the 1970s, all confusing periods without trend.”
Deflation not inflation
The second thing to consider is the bond market. It is now in a bull market that has lasted 28 years. Bond bull markets tend to end slowly (and with little fanfare — it’s not like they dominate the headlines).
As the bull market comes down, yields remain low for a long time. But when interest rates rise again, it signals a bear market in bonds, with dropping prices and rising yields. This will not happen until employment in the industrial world, especially in the U.S., starts moving up.
In the meantime, lingering low bond yields signal deflation rather than the oncoming gallop of inflation.
And that brings us to point number three. Gold.
A hedge against deflation
Gold appears to be in a bull market, and there are good reasons to believe it will stay there, says Mr. Dunbar.
While many regard gold as a hedge against future inflation, this analyst likes it as a hedge against ongoing deflation, “a store of value in a time of uncertainty.” And not incidentally, he observes, deflation would cut costs for the very mines that produce gold.
The biggest gainers in the decade after 1932 were gold mines. “I expect a similar outcome in the next few years,” says Mr. Dunbar.
Indeed, commodities should be strong while finance and consumer markets stay soft. And gold stocks may be the strongest.
Risk-reward balance
The stocks Mr. Dunbar recommends first in Investor's Digest of Canada are mid-sized and junior firms with impressive market valuations. All are “enlarging known gold deposits in Canada” and most have mines in operation. They all have the potential to become big producers.
To avoid risk, all of these companies operate solely or mainly in Canada. “In my view, they have an attractive risk-reward balance,” says the analyst. There are six of them. None of them pay dividends.
Kirkland Lake Gold (TSX-KGI) has a market cap of $530 million and trades at $8.99.
Lake Shore Gold (TSX-LSG) has a market cap of $878 million and is trading at $4.10.
Queenston Mining Inc. (TSX-QMI) has a market cap of $320 million and trades at $5.30. It is one of the two not yet in production.
Rubicon Minerals Corp. (TSX-RMX) has a market cap of $968 million and trades at $5.00. It is not in production, but may have a large ore body.
San Gold Corp. (TSX/V-SGR) has a market cap of $836 million and trades at $350.
Wesdome Gold Mines (TSX-WDO) has a market cap of $222 million and is trading at $2.25.
Of course, those who want to lower their risk even further will go with the big guys. Mr. Dunbar has three choices. Agnico-Eagles Mines (TSX-AEM) trades at $56.92 and yielding 0.3 per cent on a dividend of $0.19. Goldcorp (TSX-G) is trading at $41 and yielding 0.5 per cent on its $0.19 dividend. Barrick Gold (TSX-ABX) stands at $41.66 with a 1 per cent yield on a dividend of $0.42.
Finally, if you’d like to try gold exploration stocks, Mr. Dunbar has one candidate he likes. Virginia Mines (TSX-VGQ) has already sold one discovery to Goldcorp and is investigating more prospects in northwestern Quebec. With a market cap of $158 million, it trades at $5.42.
In conclusion, this analyst warns investors not to look for any clear trends as we head into the next decade. Still, while the future may appear murky at first, it could turn out to be golden.
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