The Ormetal Report

Gold stocks: the next Internet boom!

If you have been around for more than 20 years and have observed the sharp and volatile cycles of the mining sector, you know that what lies ahead is a much bigger bonanza than what we got in the 1976-1980 rally when gold reached $850. You may remember the Little Long Lac Gold Mines, Lake Shore and other junior golds that went through the roof during that period. Well sit tight, many new juniors are waiting in line to duplicate this glorious era of the gold mining industry.

Back then, total gold inventories (including Central Banks reserves) plus the total market capitalization of all the gold mining companies in the world went for approximately $850 billions. At the time, the US equity market was worth just a notch above the golds or US $1000 billions ($1 trillion). Nowadays, the golds (inventories and stocks) are worth slightly above US$1050 billions ($1.05 trillion) but the US equity total market cap soared to exceed $US 11,000 billions ($11 trillions). In short, when the trigger is pulled, there will be much more money chasing gold and gold stocks than at any time in market history.

Today, there are 4.3 billion ounces of gold in the world and the supply is increasing by only 1.8% each year. On the other hand, $5,8 trillions US dollars are floating around the world and the supply is growing 4 or 5 times faster than gold. Since 1979, We have gone from a US$/gold ratio of 281:1 to an unsustainable ratio of 1325:1. Surprisingly, gold prices in late 1979 were near $281. But why aren’t they near $1325 today ? OK the economy put in some real growth in those 20 years. But the price of gold should be very near $700 today when inflation is accounted for. Don’t look further there is only one reason to explain this extreme distortion, the anti-gold propaganda of the last 3 years.

Don’t blame it on the absence of inflation, the numbers are clear. There is a growing demand for gold and the physical deficit is surging, despite low inflation:

The trend is clear. The most important number on this chart is the supply from scrap gold. Gold from this source has been near the 400 tons (12 millions ounces) level in the early 1990’s when gold traded near $325. This number grew to 20 millions ounces when gold prices increased to $410 in 1994 and stayed there until 1998. Then the supplies increased to 35 millions ounces (1075 tons) with the Asian crisis. You all remember the Korean campaign to sell gold at the worst of the crisis. With gold now below $300, you can bet on a large drop in future scrap gold supplies. You can also count on lower mine production as more and more gold mines close in the months ahead. Lower gold prices will also eventually bring an end to the gold sales and leases by the Central Banks and the IMF. The reason is simple: the lower are the prices, the more anger you will see from those who need them high to earn a living. The miners are starting to protest and their action, together with the lobbying of other groups like GATA, will put an end to this nonsense. Lower prices will also put an end to forward sales as more and more miners move to unhedged positions. The hedging process is slowly reversing, so will gold prices.

This new balancing act on the gold supply-demand equation will have a tremendous impact on gold shares. There is no need to say that despite the largest bull market in history, gold and mining stocks have gone nowhere but down. That is normal given the trend in precious and base metals prices. But this again creates a major distortion that will be repaired. In 1979, the total US equity market was worth almost the same as all the gold inventories in the world. Today you need only Microsoft and a few Amazon.com to buy all the gold miners and the gold metal in existence since it was discovered by the ancients.

When you start seeing junior mining companies with several millions ounces of gold in the ground selling for less than $5 per ounce, you know that something is wrong. Undervalued companies are found in all segments of the industry with a major concentration in the junior and mid-tier stocks. Companies with promising deposits, no debts and some cash are waiting for their day. The cycles have already turned in the base metal sectors and some favorite mining stocks are already showing gains of 200-300% in the last few months. Zinc and copper are off their recent 20-year lows. Gold and silver will follow soon.

Prepare your bets, within the next 12 months, the biggest bull market in the history of mining will be upon us.