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In a word, no. We divide our rationale into three
parts.
Macro
Back in 2008, a recession was beginning, the private sector was in
intense deleveraging mode and the credit markets foreshadowed what was to
come in the equity and commodity markets. Today we are seeing growing credit
stress on the sovereign side and not in the private sector as we had in 2008.
Certainly there are issues with banks but its impossible to see a repeat of 2008 when major
liquidation, bankruptcies and layoffs already happened. They can and will
happen again but the scale would be much smaller and so would the effect on
capital markets.
A private sector credit contraction is deflationary because the
private sector can’t monetize its debts or take on more debt. Therefore
it curtails risk and sells assets in order to deleverage. Credit problems on
the sovereign side have inflationary implications. Sure governments do sell
some assets but that is in dire circumstances. It’s far easier to restructure,
monetize and/or take on more debt or default. In each and every case, the
currency loses value and inflation rages.
Those who expect another 2008 seem to ignore that the private sector
crisis already happened. The next act(s) is the sovereign debt crisis in
Europe, Japan and eventually the US.
Sentiment
Also, we want a key difference in sentiment. In 2008, sentiment
remained quite bullish on Gold and Silver for several months after the March
peak. Today Gold and Silver are trading off their highs but sentiment figures
reflect more caution or indifference. Here are some figures.
In 2008, public opinion on Gold peaked at 85% bulls in March and then
at 79% bulls in July. Today it is at 66% bulls. The peak of the speculative
long position in July 2008 was only 3% below the peak in March. Today, the
speculative long position is 22% below its recent peak of late 2010.
In 2008, public opinion on Silver peaked at 88% bulls and then at 73%
bulls in July. Today, it is at 39% bulls. The speculative long position peaked
in July 2008 only 6% below its peak in March. Today, the speculative long
position is not only 43% below its peak in February but its sitting at a
two-year low.
Furthermore, assets in the Rydex Precious
Metals Fund have declined 61% since the start of the year! Assets are
currently at a two-year low!
Profit Margins
To get a handle on miner profit margins we look at Gold/Oil and
Gold/Industrial Metals which are fairly reliable leading indicators for miner
profit margins. Below is the chart…
We use a 200-day moving average to smooth out the volatility. In the
summer of 2008, the 200-day MA of the Gold/Oil ratio was about 8. Its presently at 15 which aside from early 2009, is at a
10-year high. The Gold/Industrial Metals ratio in the summer of 2008 was at
2.0. It’s now at 3.11. In 2007-2008, the ratios were near four-year
lows and that was reflected in the weak relative performance of gold stocks.
Note that the ratios began rising in summer 2008 and then a few months later,
gold stocks rocketed higher in nominal terms and relative to Gold. These
ratios have been rising for several months and if it continues, we should
expect gold stocks to strengthen against Gold.
The high long-term levels in these ratios indicates
that profit margins should be strong as is. Below is a chart from Frank Holmes and CIBC that shows earnings
have been steadily increasing across the entire sector. In recent quarters
the intermediates and juniors have shown the strongest earnings growth.
Conclusion
The differences between today and 2008 (with respect to the gold
shares) are evident on both a micro and macroeconomic spectrum. In 2008,
sentiment was too bullish on Gold and Silver while fundamentals for the
mining equities were deteriorating as a result of high Oil and high
inflation. Today, fundamentals remain as strong as ever and are likely to
improve thanks to Gold and Silver outpacing mining cost inputs. Meanwhile,
sentiment indicators are extremely favorable for both the metals and the
shares. Finally, the big picture has shifted. The shock of the private sector
credit crisis has passed while the sovereign debt crisis is next on stage.
Jordan Roy
Byrne
Trendsman.com
Jordan
Roy-Byrne, CMT is the editor and publisher of Trendsman.com. You can get a
free 14-day trial to his Gold/Silver service by clicking
here.
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