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.
- Add Barrick Gold to my watchlist.
- Add Newmont Mining to my watchlist.
- Add Goldcorp to my watchlist.
