The only bull market we can compare the current eight year rise in the price
of gold to is the ten year rise in the 1970s. The Aden sisters, Mary Anne and
Pamela, have extrapolated the future price of gold using the same growth rate
as in the '70s and applied it to the current bull market and reported their
findings in their latest Aden Forecast. They determined that if one were to
compare the bull market's second rise from 1976 to 1980 to the current bull
market we could see gold eventually reach $4,100 during the next run-up.
They further reported that if one were to take the entire bull market gain
in the 1970s at 2,300% and extrapolate it to today's situation then $5,800 would
be the equivalent upside target.
The Adens concluded that "with today's bull market being far more global in
scope compared to the 1970s, we could eventually see these much higher gold
price targets realized. This is especially so factoring in that gold's peak
in 1980 at $850 is the equivalent of about $2,400 in current dollars.
Gold has not even approached that level yet and the situation is far more serious
now than it was then."
And silver? "Silver is more volatile than gold. It fell more than gold last
year, and it has risen more than gold this year (See table below: silver +55%
vs. gold +19% YTD). This makes sense because silver is both a precious and
a base metal. To foresee silver's potential compared to gold, look to copper
as a guide. Copper is a good barometer because it rises during times of global
economic growth. That is, when you see both gold and copper rising together
(See table below: gold +19%; copper + 95% YTD), then silver will most likely
be stronger than gold... If global growth remains on a positive track, we will
continue to see silver outperform gold." And such is holding true today.
I mentioned in my previous article "Can Gold and Silver Equities Expect +5,000%
Returns Again?" that gold and silver stocks realized absolutely amazing gains
in the 1970s with several increasing in excess of 50,000% - yes, 50,000%! -
as gold skyrocketed in price from $35 to $850 per ounce. And that was gold
stocks not the warrants of gold mining/royalty companies that perform dramatically
better than their associated stocks (more on the secret of leverage later in
the article). So what can we expect in the price of gold and silver equities
should we indeed see $4,100, let alone, $5,800 gold prices in the near future?
Well, the stock of the 22 companies (5 large-cap; 3 mid-cap; 2 small-cap and
12 micro/nano-cap) in our proprietary Gold/Silver Companies with Warrants Index
(GCWI) have appreciated by 215% from their 52-week lows in 2008. In
addition, the 24+ month duration warrants of those 22 companies (26 in total)
in our Precious Metals Warrants Index (PMWI) have already gone up 445%.
That is correct: 445%. During the same period gold has gone up 49% from its
low of $705. Talk about leverage. That represents a 4.4 times greater increase
for such stocks and 9.1 greater increase for their associated warrants. Very
impressive!
As the table below shows, the average large cap gold and/or silver mining/royalty
company, as represented by the HUI, is up 2.5 times that of gold bullion YTD
while the micro/nano cap companies, as represented by the CDNX, are up 5 times
that of gold bullion YTD. Carrying that comparison one step further, those
gold and silver companies with warrants (GCWI) are up almost 4 times
that of gold bullion YTD and their associated warrants (PMWI) up by
almost 6 times that of gold bullion YTD. Therein lies the advantage of investing
in the shares and/or warrants of gold and silver mining/royalty companies rather
than in the bullion itself.
Last Week's
% Performance(1)
| |
Prev. Wk |
Prev. Mo |
YTD(2) |
| Gold |
0.3 |
4.5 |
19.1 |
| Silver |
-1.5 |
2.7 |
54.5 |
| HUI(3) |
0 |
5.2 |
47.5 |
| GDM(4) |
0.2 |
5.4 |
42.8 |
| CDNX(5) |
2.5 |
6.8 |
97.2 |
| TSX |
1.2 |
3.3 |
51.1 |
| S&P 500 |
1.5 |
1.8 |
20.4 |
| CCWI(6) |
-0.1 |
5.7 |
115.1 |
| CWI(7) |
1.8 |
10.1 |
213.9 |
| GCWI(8) |
-0.2 |
5.8 |
75.1 |
| PMWI(9) |
0.9 |
9.6 |
112.7 |
The Advantage of Owning Precious Metals Mining/Royalty Stocks instead of
the Bullion Itself: Leverage
If gold, for example, were to escalate considerably in price (i.e. to $2,000,
$3,000, or even more) in the next few years it would have a significantly positive
impact on the profitability of the companies who mine it and the royalty companies
that buy it from marginal producers. For example, with gold priced at $1,000/oz.,
and the cost of production at perhaps $600/oz. the gross profit margin of gold
mining companies would be 40.0%. If 2 years from now, however, gold were to
increase to $2,000 and the cost of production were to increase by only 20%
to $720/oz. then the mining companies' gross profit margins would have gone
up from $400/oz. to $1280/oz. or 220%!
That's called leverage and historically, in a rising market, the ratio for
gold and silver mining/royalty shares vs. physical gold ranges from about 2.5:1
for large-cap gold and silver mining/royalty companies on average to as much
as 5:1 for smaller cap gold and silver mining/royalty companies, on average,
(currently up 4.4:1 from its 52-week low) and even 10:1 in exceptional circumstances
for certain truly outstanding performers. All the more reason to do your due
diligence to find and invest in those gold and silver mining and/or royalty
companies with the right mix of capable management, strong financing,
major resources and geographically and politically well-located properties
to reap the major benefits a surge in the future price of gold and silver will
present.
The Added Advantage of Owning the Right Warrants of the Right Precious
Metals Mining/Royalty Companies: Leverage-on-Leverage
For those who buy the right long-term warrants associated with the right gold
and silver mining and/or royalty companies at today's still undervalued prices,
your eventual returns would likely be 1.5 to 3 times greater (currently 1.5:1
YTD for the Precious Metals Warrants Index - PMWI - vs. the Gold/Silver Companies
with Warrants Index - GCWI) on average than had you invested in their associated
stocks. For companies whose warrant prices go through the roof with extraordinary
gains, in and of themselves, or from extremely depressed values, as experienced
in 2008, that ratio could represent a ratio as high as 10 times greater than
having invested in the metal itself (currently up 9.1:1 from its 52-week low).
Such over-and-above gains are referred to as leverage-on-leverage or doubling-up
on the leverage factor. The catch is, however, that you have to know whether
or not the warrant associated with the stock you are interested in buying is
the right warrant i.e. has a leverage/time value sufficiently high enough
to justify its purchase given the anticipated appreciation in the price of
the associated stock. For those who don't have a clue what a warrant is, which
companies have them, which have the best values and exactly how to go about
buying them check out the Precious Metals Warrants site hyper-linked below.
Conclusion
If gold were, in fact, to increase from its current $1050 or so to $5,800
that would represent an increase of 452%. The current leverage exhibited by
the component stocks of the HUI is 2.5:1 vis-à-vis gold. Were that leverage
applied to future gold and silver mining/royalty company equity prices it would
extrapolate into an average price increase of 1130% for such large-cap stocks.
Applying the current YTD performance of the GCWI, which is out-performing
gold bullion by a 3.9:1 margin, one could anticipate an average increase of
1,760% (452x3.9) in the average stock price of gold and silver mining/royalty
companies with warrants. The component warrants in the PMWI have out-performed
the price of gold by a margin of 5.9 to 1 YTD which would suggest that the
average warrant could expect to increase by approximately 2,668% (452x5.9)
were gold to escalate to $5800! And that is on average. Indeed, if the trend
to date from their 52-week lows were to continue the projected 452% increase
in gold would extrapolate into a 1989% (452x4.4) increase in the price of the
average precious metals mining/royalty stock and an amazing 4,113% (452x9.1)
in the price of the average warrant!
Certain junior mining/royalty companies will hit the mother-lode and experience
dramatically greater increases in their stock prices than the average and the
leverage-on-leverage benefit of warrants should cause some of the right warrants
of the right mining/royalty companies to experience 5,000% or more. So "Does
the Adens' $5,800 Gold Projection Suggests +5,000% Gains in Junior Equities?" In
some cases it appears so!
