Casual observers of gold typically fall prey to the simplistic notion that fear is the primary motive behind decisions to acquire gold exposure. The only times I have observed fear among gold investors have been during the periodic corrections that test their confidence in the long-term bull market trend, tempting them to sell into weakness.
Because the early 2012 rally that preceded the "Leap-Year Gold Massacre" was so short-lived, following as it did a prolonged period of weakness in the second half of 2011, the latest breakdown is a source of understandable frustration for gold investors. The related mining equities have been underperforming for quite some time, and lately it seems they've been producing more disappointment than gold. Major asset writedowns have hammered Kinross Gold (NYSE: KGC ) and Newmont Mining (NYSE: NEM ) , and severe cost inflation has challenged even the large-scale development projects at Barrick Gold (NYSE: ABX ) .
More recently, the charts have turned uglier still, opening the possibility that gold and related equities could be in for a bit more near-term weakness before staging another reversal. Furthermore, as the financial world ebbs and flows with each change in the perceived likelihood of additional quantitative easing by the Federal Reserve, some gold investors will undoubtedly throw in the towel.
Gold falls prey to unfounded pessimism
Courage and conviction are required to stand strong with gold exposure in the face of dramatic declarations like letter-writer Dennis Gartman's recent assertion that the gold bull market ended all the way back in August of 2011. Interestingly, in the days following the Feb. 29 collapse in gold that so impaired the near-term technical landscape, Gartman himself pondered "the prospects that something manipulative and perhaps even nefarious took place Wednesday in the gold market." John Embry, chief investment strategist at Sprott Asset Management, slammed Gartman's bearish call in an interview with King World News, stating: "Given Dennis's unbelievably inept record at calling the gold price, in both directions, I regard this event as wildly bullish."
Of course, I am convinced that Gartman's grossly premature call will suffer the same fate as Nouriel Roubini's claim in 2009 that "those people who delude themselves that gold can go to $1,500 or $2,000 are just talking nonsense." At the time, I took Roubini to task for what I considered his "worst call ever" and encouraged my readers to instead heed the bullish outlook offered by Jim Rogers. History has already settled that score, but the exercise provides a timely reminder for investors to reassess their resolve in response to the busted sentiment, intimidating headlines, and unfriendly charts that periodically test the mettle of long-term gold investors. With much attention heaped upon the bearish perspectives of late, I will present below a set of opinions that underscore the resiliently bullish long-term outlook for gold.
Commodity guru Jim Rogers remains resolute in his bullish long-term outlook for gold and silver, indicating last week that he intends to buy more on any further price weakness. While anticipating some additional near-term decline in prices, Rogers approaches the pullback with the opportunistic perspective that I consider paramount to successful navigation of bull markets as inherently volatile as those for gold and silver.
According to newsletter writer Richard Russell, China is operating under a similar strategy. Russell referred last week to a "Chinese put" under the gold price, adding: "China is moving in to scoop up gold on any gold weakness. At the low 1600s and below 1600 -- it's 'enter the dragon.'"
Economist Marc Faber has identified two "huge bubbles" -- one in U.S. public spending and government debt, and another in "the wealth and the income of the super-wealthy" -- but he vehemently resists the notion that gold is a bubble. Faber appears utterly unfazed by the recent weakness in gold:
For the last 40 years in my business I've seen people always lose money when they put too much money into something and then it goes down. They panic and sell, or they have a margin call to sell -- and lose money. I own gold. It's my biggest position in my life. The possibility of the gold price going down doesn't disturb me. Every bull market has corrections.
And then there are the banks, which are finally adapting to the new reality of gold after failing to prepare their clients for the initial stages of the monetary metal's ascent. Morgan Stanley reiterated its bullish outlook, stating: "We believe that the recent weakness in gold is a good entry point as some elements of the recent selling pressure appear to be at odds with the FOMC's still-dovish position." Standard Bank expects an average gold price of $1,790 for 2012, which would imply substantially greater strength during the second half of the year than we have seen thus far. Japanese firm Nomura characterized its price forecast for $1,791 in 2012 and $2,063 in 2013 as being "in line with consensus estimates." BNP Paribas is substantially more bullish, targeting average prices of $1,850 for 2012 and $2,225 for 2013. Goldman Sachs recently issued a buy recommendation for gold with a six-month price target of $1,840 per ounce.
Deep value in quality miners is a safe haven while awaiting QE3
For many gold investors, the doubt that periodically sets in revolves around dynamic projections regarding the likelihood that the Federal Reserve and other key central banks will engage in further accommodative policy intervention through some combination of liquidity injections, zero-bound interest rates, quantitative easing, etc. That's a topic for another day, but I think PIMCO co-founder Bill Gross summed it up nicely last week when he tweeted: "Central banks are where bad bonds go to die. Without QE, the financial markets & then the economy will falter."
Because I am as convinced today as I have ever been that gold will trade to $2,000 per ounce and well beyond, and given the extreme undervaluation I perceive among a broad swath of the related mining equities, I remain steadfastly invested in the space. The standout bargains are frankly too numerous to mention, but Primero Mining (NYSE: PPP ) remains a strong favorite of mine. Of the larger producers, Goldcorp (NYSE: GG ) is the first coin I would stash in my pot of gold. I have issued bullish CAPScalls for both stocks and selected them as top picks within my Motley Fool CAPS portfolio. I am 100% unshaken by this latest corrective phase, and I believe quality gold-mining equities at current valuations will someday be seen as one of the great market opportunities of our era.
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