5 Imminent Catalysts for Gold Stocks, Part II

Like an epic stage production, this multiyear bull market for gold and silver is supported by an enormous cast of fundamental drivers and catalysts that come together -- in highly dynamic combinations -- to propel this long-term upward trend through successive periods of breathtaking market outperformance.

I believe that gold mining stocks are poised for another major growth spurt. To set the stage, I've selected five of the most immediate and identifiable drivers of likely outperformance over the coming weeks and months. In Part 1 of this analysis, we considered the unprecedented profitability that miners are likely to reveal when they report fourth-quarter 2010 earnings over the next few weeks and the expanding dividend yields that may entice fresh interest in these shares. We also assessed the condition of global demand for gold and discussed a few of the very strong indicators of continued long-term growth in demand.

Peering into the market for a third looming catalyst for gold stocks, my Foolish lens focused upon another metal entirely.

3. Silver's slingshot effect slings both ways
Gold and silver, as the world's foremost monetary metals, are inextricably linked to each other in their own complex web of interconnection. As I have done for some time now, I like to visualize the two as being tethered together by the flexible cord of a slingshot. Near-term market conditions can permit either metal to stretch out ahead of the other, but ultimately the energy stored by that stretching tends to snap the two back into relative equilibrium.

Typically, gold has tended to play the role of the trailblazer, while silver has tended to lag gold's major movements before ultimately snapping into larger percentage moves. More recently, however, silver has grasped the precious reins and charged boldly from behind gold's shadow. In his recent analysis, "Silver Breaks its Golden Shackles," Adrian Douglas visually illustrates the dramatic way in which silver appears to have embarked upon a brand new price relationship to gold relative to that which held sway for the preceding seven years. We would have to sit down over a very large coffee to cover all the causes I ascribe to these developments, but suffice to say I believe that persistently acute tightness in physical silver supply gives silver the potential to further hasten the upward trajectory of both metals and their relevant stocks.

When hedge fund manager Eric Sprott launched the Sprott Physical Silver Trust ETF (NYSE: PSLV  ) in late 2010, the significant difficulty his company experienced in securing timely delivery of silver bullion offered a visceral illustration of the degree of undersupply. Incredibly, the trust's initial silver purchase of a modest 22.3 million ounces -- or slightly less than the estimated 2010 haul for Silver Wheaton (NYSE: SLW  ) -- required more than two long months before full delivery was made. Sprott grew "concerned about the illiquidity in the physical silver market", and added: "We believe the delays involved in the delivery of physical silver to the Trust highlight the disconnect that exists between the paper and physical markets for silver."

China ranked third among global silver producers in 2009, with a reported 89.1 million ounces of output. Miners such as Silvercorp Metals (NYSE: SVM  ) have pursued ambitious production growth, yet demand has far outpaced production gains and caused China to transition from a net exporter to a net importer of silver. China's net silver imports reportedly quadrupled in 2010 to reach 112 million ounces.

Acute physical tightness and reported illiquidity in the silver market -- further corroborated by the rare condition of backwardation observed within the COMEX silver futures market -- point strongly to the potential for silver to continue its dramatic upward charge. Sprott's chief investment strategist, John Embry, recently observed: "There is infinitely more demand for physical silver than there is supply. I mean, all of this stuff coming out of the ground is long since spoken for by traditional industrial and medical uses." My own assessment of the silver market affirms this view, and in a noteworthy departure from the preceding dynamic, I see gold and gold mining stocks riding a wave of silver's momentum in addition to its own unique catalysts.

4. You have scarcely seen the start of industry consolidation
By now you may have gathered that I expect to see substantially higher prices for both gold and silver forthcoming. It's no secret: I've maintained my conservative long-term price targets of $2,000 gold and $50 silver unchanged since 2007. But even if we could somehow snap our Foolish fingers and freeze prices at today's already-elevated levels, I submit that quality gold mining stocks would nonetheless exhibit a surprising degree of upward momentum.

Major gold producers have an incurable itch for strategic acquisitions, much the way Christopher Walken could not get enough cowbell. With truly world-class gold deposits proving harder to find and mine-development timelines stretching out for many years, major miners such as Barrick Gold (NYSE: ABX  ) and Newmont Mining (NYSE: NEM  ) have few alternatives to the prospect of buying their way to replacing production over time. Newmont's recent $2.3 billion acquisition of Fronteer Gold (AMEX: FRG  ) offers a perfect example, except that I see competition for assets heating up further to yield rising asset valuations. Goldcorp (NYSE: GG  ) in particular has executed some cunning moves to elbow Barrick and Newmont away from key strategic assets, but I suspect that's merely a harbinger of the consolidation free-for-all that will ultimately be required to sustain -- let alone to increase -- global gold production.

5. $2,000 gold is not just for gold bugs anymore
Of course, none are apt to succeed in freezing gold prices where they stand. Back in 2007, my forecasts for $2,000 gold spawned no shortage of dismissive jeers and disparagement. Thankfully, sufficient consensus has now grown around such targets to engender discussions with a generally more respectful tone. Like an idea whose time has come, the transition of gold's bullish outlook from the fringes of finance to the center of attention coincides with a gathering visibility and continuing foray into the ranks of well-selected stock portfolios.

As a Fool who has observed every moment of this bull market with limitless fascination, I feel qualified to observe that investor interest in gold stocks exhibits not the manic or ubiquitous nature that gold's bubble-callers might have you believe. Rather, I observe only a gradual groundswell of concerted investment interest that leaves ample room for new waves of investors to bid up share prices nicely once gold's next big surge takes hold. Deutsche Bank seems to agree, opining that no bubble will exist in gold before the $2,000 level has been breached.

The list of qualified persons and entities touting the likelihood of $2,000 gold -- while still shy of representing a consensus -- is long and growing. The list includes banks such as Deutsche Bank, Credit Suisse, and Citigroup. It includes legendary investors such as Jim Rogers, and successful hedge fund managers such as John Paulson. Even mining industry CEOs -- including Newmont's Richard O'Brien and Sean Boyd from Agnico-Eagle Mines -- have ditched the customary ultraconservative price projections for public acknowledgements that $2,000 gold looms. Although market expectations are not by themselves a direct catalyst for gold, a gathering consensus for higher prices will indeed welcome new investors into the fray, enhance both the breadth and bullishness of gold stock coverage by analysts and bring us one step closer to that sort of ubiquitous gold exposure that could indeed signal the bull market's eventual terminal stage.

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 Agnico-Eagle Mines, Fronteer Gold, Goldcorp, Silvercorp Metals, and Silver Wheaton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (39)

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 February 11, 2011, at 3:21 PM, Jbay76 wrote:

    Chris,

    I have been waiting all week for part 2..talk about suspense. So how big a coffee do you want and from who? How about beer instead :)

    I was expecting to see fiscal policy as a catalyst, but suffice to say, the info is well appreciated as always! I wonder how long before someone tries to acquire RBY. And, one thing that's been on mind is;;;where is Freeport Mcmorran in all of this? They mine Au and Cu, so I would expect them in on this stuff, but I don't recall you mentioning them. Are they just too big? Their P/E of 14 and change seems to suggest they're a good buy...

  • Report this Comment On February 11, 2011, at 5:27 PM, XMFSinchiruna wrote:

    JBay76,

    I sought with this particular discussion to really hone in on those catalysts that were most directly relevant to the gold mining stocks in particular. Since I have addressed monetary and fiscal policy at length in numerous prior discussions (see link below, for i.e.), and since those issues are clearly implied contributors to catalyst #2 in Part I, and catalyst #5 above, I saw fit to skip those gloomy items this time around.

    http://www.fool.com/investing/general/2009/06/02/the-top-10-...

    You are correct to recognize Freeport's relative heft in the gold market, with some 40 million ounces in reserves, but all of that gold is coincident to the primary target in its operations, which is still copper. Gold is a very common byproduct of copper production (and vice versa), just as gold miners like Newmont and Yamana enjoy significant copper credits. Accordingly, any assets likely to attract Freeport's acquisitive attention would yield copper as the principle target. After forecasting a decline in both copper and gold production volume for 2011, I certainly could envision FCX launching a major strategic acquisition this year. After logging 2010 operating cash flow of $6.3 billion, it's clear they have sufficient resources at their disposal to get a major deal done.

    As for RBY, I've been wondering the same thing for a couple of years now.

    Fool on!

  • Report this Comment On February 11, 2011, at 6:32 PM, xetn wrote:

    I think you have overlooked the major catalyst: the actions of the world's central banks creating trillions of new money out of thin air, hoping to energize their respective economies. That includes China, which has created its own bubbles in real estate and infrastructure (like the city built to house 1 million people and is mostly empty).

    I believe that the recent run up in the prices of various commidities such as wheat, rice and of course precious metals, is a direct result of the inflation of the various money supplies.

  • Report this Comment On February 12, 2011, at 11:19 AM, Jiovanna wrote:

    Okay, folks, don't get too excited about this report. After all, the guy doesn't even have Paulson's first name correct. It's not JIM it's John. Please, let's have some good writers on this blog who aren't scam artists! Albeit gold/silver are still good investments till the world equalizes its wealth.

  • Report this Comment On February 12, 2011, at 12:13 PM, tarmacmonkey wrote:

    I may be about to demonstrate a lack of grasp of the reality of the Gold phenomenon but one of the strongest arguments in favour of both gold and silver seems to be that "governments can't fire up the printing presses and produce more"

    its a compelling point in the light of how much money is being created to hide the reality of the state of the western economies.

    BUT could all the activity in the world of precious metals create a similar effect? Old mines that were once considered uneconomic being re-started, new mines being opened in Africa, Kazakhstan,Turkey, Mexico etc. Could this wave of new supply have the effect of diluting the value of what is in the vaults?

    btw have a look at the potential of Nautilus minerals (NUS) for a game changer in the production of gold, They will create a sound business out of copper and zinc which we actually need. Gold is of little use in the modern world other than a store of value that cant be manipulated etc. etc.

    I have 40% of my portfolio in allocated bullion and about 10 small positions in junior miners so i hope i'm wrong, maybe a fool with a sound understanding of the quantities involved can comment?

  • Report this Comment On February 12, 2011, at 2:15 PM, XMFSinchiruna wrote:

    xetn,

    You are absolutely correct to point out the massive role that central banks, and in particular the Fed, have played in both creating and then exacerbating this crisis environment for fiat currencies like the USD. You can rest assured I did not 'overlook' that mother of all fundamental drivers of the gold price. After offering dozens of discussions in the past where that driver was in the spotlight, again, I sought to take a different angle in this case. In any event, I consider these 5 imminent catalysts for gold stocks in particular to be well worthy of consideration by investors. For my prior treatments of monetary policy and crisis interventions and their role in this precious metals bull market, try the following links:

    http://www.fool.com/investing/general/2011/01/21/your-last-b...

    http://www.fool.com/investing/general/2010/11/08/bernanke-fi...

    http://www.fool.com/investing/general/2010/09/23/death-knell...

    http://www.fool.com/investing/general/2010/06/23/why-gold-wi...

    http://www.fool.com/investing/general/2009/09/23/biggest-mar...

    http://www.fool.com/investing/general/2009/06/02/the-top-10-...

    http://www.fool.com/investing/general/2009/05/26/the-top-10-...

    http://www.fool.com/investing/general/2008/10/02/700-billion...

    http://www.fool.com/investing/general/2008/03/19/dodge-the-d...

  • Report this Comment On February 12, 2011, at 2:23 PM, XMFSinchiruna wrote:

    Jiovanna,

    Scam artist? :) That seems a bit rough for a slip of the fingertips. Good thing I didn't call him Hank. :)

  • Report this Comment On February 16, 2011, at 5:42 PM, LALIBERTEW wrote:

    Does anybody have info on a 3 million oz. gold find in Northern Australia by a Toronto based gold mining co NAME UNKNOWN. or is this another gold scam

    W.R.

  • Report this Comment On February 17, 2011, at 10:16 AM, XMFSinchiruna wrote:

    Lalibertew,

    Based upon the information given, nothing rings a bell for me to match the description. That doesn't mean it's not there ... I do occasionally miss a headline. :)

    Generally speaking, promising investment opportunities are so ubiquitous in gold right now that one can certainly resolve to invest only in those companies for which exhaustive due diligence has been carefully executed.

  • Report this Comment On February 17, 2011, at 1:00 PM, jamo101 wrote:

    Hi Chris,

    What do you think of Hecla mining's delay in reporting earnings from today to 28th? Anything to be concerned about? Thank you

  • Report this Comment On February 17, 2011, at 4:13 PM, XMFSinchiruna wrote:

    jamo,

    http://phx.corporate-ir.net/phoenix.zhtml?c=63202&p=irol...

    "The company has decided to postpone the release of its fourth quarter results due to ongoing settlement negotiations regarding the CERCLA litigation involving our subsidiary Hecla Limited and historic mining activity in the Coeur d'Alene basin in north Idaho. This does not result from any disagreement with Hecla's auditors or any accounting or financial irregularity."

    Pages 10 through 12 of the filing linked below should provide helpful background information.

    http://google.brand.edgar-online.com/EFX_dll/EDGARpro.dll?Fe...

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