Are You Ready for the New Chapter in Gold?

Like any epic tale, the final story of the precious-metals bull market of the 21st century will be divided into chapters.

Chapter 1 was comprised of a rather gradual and widely underestimated climb from beneath $300 per ounce to peak beyond $700 in 2006. Chapter 2 was the first big gut check: a 16-month corrective phase that shook this Fool's confidence enough to sell a few positions.

When gold rocketed higher in Chapter 3 on its way to breach $1,000, the world began to take notice ... just in time for gold to sucker-punch a flock of eager investors with the onset of a brutal 18-month correction (you guessed it: Chapter 4).

Knowing where we stand
My favorite college professor once said to me: "To know where you're going, you first have to know where you are." We are in the early stages of Chapter 5, which I perceive as the next major upward phase of this multiyear event. I have stated before that successive chapters will usher in greater degrees of volatility in gold prices, and I expect bold counter-directional moves within Chapter 5 that some will interpret as new chapters.

Amid all the clatter of a gold overload, I still observe some investors awaiting a huge pullback before initiating their dollar-defensive positions. If the prior chapters are any guide, though, then Marc Faber's pronouncement of a new floor at $1,000 must be taken seriously. Notwithstanding a possible retest of the $1,000 mark, I see Chapter 5 taking gold prices to anywhere from $1,250 to $1,650 per ounce before the onset of another major corrective phase. The key driver of how this all plays out, of course, remains the fate of the U.S. dollar.

Fresh from a particularly embarrassing chapter in its own history, the world's largest gold miner has become the herald of an important secondary driver of future gold prices. Barrick Gold (NYSE: ABX  ) CEO Aaron Regent has been drawing attention to a looming shortfall in global mine supply for months, and this week he dropped something of a bombshell by declaring his view that the world has passed the "peak gold" mark.

As I have noted, very large gold deposits are becoming much harder to find, and production from traditional heavyweight South Africa has been in terminal decline since 1970. Regent notes that global mine production has declined 10% in the last decade, having peaked in 2000. According to one analyst, exploration budgets have tripled over the same period. They're looking harder, spending more, and finding less ... and this can only lead to upward pressure on gold prices in the long term.

Buckle up for a wild ride
Whether you're a seasoned precious-metals investor or a price-wary newcomer, the latest exchange-traded fund offering provides an exciting opportunity to position yourself for the broader trends underfoot. The launch of the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ  ) this week is an exercise in cruel timing, since the thought of piling into the junior miners and explorers after the run they've had lately is enough to give a Fool vertigo.

This ETF is bound to see some volatility, but I believe that the potential reward is an effective counterpoint to its unpredictable nature.

As major miners like Barrick struggle to replace reserves in a peak-gold world, and larger midtier miners approach the culmination of their growth spurts, I believe that the role of junior exploration and mining companies in locating greenfield deposits and advancing them toward production will become increasingly significant to the sector at large. In the context of a trend toward increasing consolidation, also, juniors offer potential upside as attractive takeover targets or partners in lucrative joint ventures.

Potential stars of future chapters
The new ETF's name is incomplete, since primary silver producers Hecla Mining (NYSE: HL  ) , Coeur d'Alene Mines (NYSE: CDE  ) , and Silver Standard Resources (Nasdaq: SSRI  ) figure prominently in the top 10 holdings. The ETF's underlying index permits companies that derive (or will derive) at least 50% of their revenue from gold or silver. Since I have argued consistently that silver is more precious than gold, this inclusion suits me just fine.

On the gold side, the list is topped by New Gold, which recently scored a highly motivated Barrick Gold as a likely joint venture partner for its El Morro project. Further down the list of ETF holdings are shares of several high-quality gold companies that I have highlighted as attractive takeover targets, including Rubicon Minerals (AMEX: RBY  ) , with its Red Lake gold bonanza, and NovaGold Resources (AMEX: NG  ) , with its 29-million-ounce Donlin Creek treasure.

On the one hand, I do not envy the dilemma faced by investors just now seeking gold and silver exposure at these unprecedented prices, but as one who owns 13 of the 38 equities held by this new junior mining ETF, I can at least appreciate that finding the right exposure for future chapters has just become a whole lot easier. 

Now that you know my thoughts on the matter, it's time to share yours by taking our Motley Poll and posting your comments below.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Coeur d'Alene Mines, Hecla Mining, New Gold, NovaGold Resources, and Rubicon Minerals. The Motley Fool has a gilded disclosure policy.


Read/Post Comments (10) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 13, 2009, at 5:23 PM, bothisellhigher wrote:

    As I have been, so shall I be...with you on the precious metals play all the way...I was "all in" AUY...sold out at a solid profit and am now "all in" in HL...hi yo silver!

  • Report this Comment On November 14, 2009, at 11:46 AM, jesusfreakinco wrote:

    Good stuff Chris. As always, thanks for your insight.

    JFC

  • Report this Comment On November 14, 2009, at 3:23 PM, lewellen180 wrote:

    Okay ... call me foolish with a small f ... but why not *gasp* just buy gold?

  • Report this Comment On November 15, 2009, at 11:10 AM, Bkeepr100 wrote:

    Gold Resource Corp: GORO is currently finishing their new crushing plant for their new mine in Mexico. If the estimates are right, this open pit mine will be producing 70,000 troy oz of gold this year, at the cost of about $100 per oz! The other metals recovered pay for most of the mining costs to get the ore. Next year the cost of mining the gold ore there drops to $0. per oz. Low cost producers will be around for the next price explosion.

    This may be one of the new big gold producers in a couple of years. It's a bit pricey right now for the stock, but they are talking about paying a dividend of $2.20 per share for the stockholders.

    Good post, Mr Barker.

    B-man Rick

  • Report this Comment On November 15, 2009, at 11:37 AM, Bkeepr100 wrote:

    Don't pay the MF for their newsletters. Use the ideas that are here on the Fool for free, use the CAPS area. Then do your own research on the prospective stocks found in CAPS.

    I prefer to do my due dilligence research on other sites such as:

    http://www.mineweb.com/mineweb/view/mineweb/en/page1

    http://www.silverseek.com/

    http://www.goldseek.com/

  • Report this Comment On November 15, 2009, at 8:24 PM, Patrikbc wrote:

    Bkeepr100: well, I don't know enough about stocks to do any due diligence. I do know that paying 149 or so bucks for a service is better than paying a FA %1 every year to accumulate my wealth for himself. I may not act directly on the newsletter's, but I'll keep reading them and everything else I can get my hands on until I can do it myself. I also know that the last thing "I" would do is take advice from a guy who will take advantage of a site's free resources for personal gain while trashing the service to other people.The company needs to make money somehow to keep free resources available. I just can't muster up that kind of hypocrisy.

  • Report this Comment On November 17, 2009, at 8:33 AM, TimoDOZ wrote:

    Where does it go where is it now? Yesterday I sold 1/3 & 1/4 of my positions in AGQ and PTM. A few days ago AGQ had a $57 handle intra-day. I prefer the Canadian shares. Both PAL the mis-named Gold miner & KGILF are in my portfolio and made big moves in the rally higher. I think these are good bets as to their being in Loonies. KGILF is still not near a 52 week high of $12 so it has plenty of upside. PAL has finally gotten past the BDF US$2.87 recent BDFinancing deal. While PAL is not in the jr miner GDXJ, the KGI is in there so I am going to ride for awhile and see if there is another correction on another dollar rally. Gold can easily test $1070. Silver has now broken the $18 barrier but again could easily settle back on a correction from here before assaulting $22 sometime next year before the massive global liquidity STARTS getting mopped up.

    Sell high buy back more, lower!

  • Report this Comment On November 17, 2009, at 8:53 AM, TimoDOZ wrote:

    I agree with Bkeeper on subscriptions to MF. If MF had A that is "A" newsletter that gave comprehensive advice then they may be worthwhile. As it is you are getting sector advice when you subscribe. You are left to spin your wheels when a sector becomes something that you should be rotating out of. This is how MF should have been advising in ALL their publications 2 years ago. Sell! and buy Gov't bonds. I am sure they have a great newsletter on Commercial Real Estate. With out it I am starting positions in AIV. Not a sector that has a lot of promise going into 2010, in my opinion. We have recently seen some sell recommendations on EDR. I have previously tried 2 of the MF publications and while subscribing got more advertizing and junk e-mail from them to buy more publications than I got in useful investing advice. On the other hand they are way better than a "BUG" like a Doug Casey who uses the same multi publications model to keep his subscribers out of and under invested in the Greatest short term bull market run since the 1930s!

  • Report this Comment On November 18, 2009, at 2:38 AM, oSUNo wrote:

    Bullion lost half it's value in a year (2008).

    They've found citizen chump will buy it on ebay, thinking - or rather tub-thumping like religious zealots - that it will "always" hold it's value.

    The big holders then sell like crazy, riding the short down on the currency market.

    There's not enough gold in the world for it to be anything other than this gigantic insider trading pogo stick.

    Ride the short down yourself if you can, but please, don't get all starry-eyed talking about gold like it's something untouchable, you're volume-lambs to the slaughter.

    The market makers are Middle Eastern oil sheiks - that should tell you something.

  • Report this Comment On December 10, 2009, at 10:50 AM, allenman75002 wrote:

    Bought RBY at 2.50...at 4.09 now..looking to hang on for the long haul...but it looks like there is a good chance for takeover...do I hang on or get out now..

    Thanks

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1043041, ~/Articles/ArticleHandler.aspx, 11/22/2014 4:09:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement