For Gold Prices, All Signs Point One Way

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Real Asset Returns Editor Peter Krauth has been telling us for quite some time that mining stocks were really cheap – so cheap, in fact, that we could expect to see an acceleration in takeover deals if the share prices didn't rebound.

And that's just what's been happening.

Back on Jan. 14, shares of Aurizon Mines Co. Ltd. (NYSE: AZK) shot up 33% after Alamos Gold Inc. (TSX: AGI) said it was buying the smaller, Vancouver-based miner.

That same day, Uranium One Inc. (TSE: UUU) revealed it was being bought out by its Russian majority shareholder, a state-run company called ARMZ, for $1.3 billion.

Best of all: Peter had recommended both stocks – Aurizon to Private Briefing subscribers and Uranium One to his Real Asset Returns subscribers.

Clearly, Peter was way out in front of this trend. I mention this because we're now seeing some of the big institutional players come out with many of the same arguments that Peter has been making to you since way back last year.

Just yesterday, in fact, I saw a research note in which S&P Capital IQ analysts said they expected gold to increase in price this year – and then detailed five catalysts they said would make their prediction come true.

I couldn't help but chuckle when I read those five reasons – because I knew that I'd seen them before.

Peter's been making the very same arguments – since last year.

Don't misunderstand: I'm not alleging intellectual theft or anything of the sort. S&P analysts clearly looked at the economic and market evidence that stands before them and came to the same conclusions that Peter did.

It's just that Peter processed that data and came to his conclusions a lot earlier – which is why our readers were able to pocket some of those nice, early takeover profits.

Even so, it's worth taking a look at this S&P report, if only because it's a nice refresher on what Peter has been telling us. So let's peruse the highlights.

According to the capital-markets researcher, gold prices are going to rise this year thanks to low supplies and loose monetary policies by the world's central banks that "debase" global currencies.

We remain "positive on the outlook for gold and gold-related investments in 2013," S&P Capital IQ Equity Analyst Leo Larkin wrote in that research note. "We expect gold to rise 15% in 2013 and finish the year at about the $1,930 level."

Peter's target price is a bit more aggressive: He sees gold trading as high as $2,200 an ounce – 30% above current prices in the $ 1,690 range.

Although Peter and S&P differ a bit over the magnitude of the advance, they both agree that the "yellow metal" is due for a run.

Here are the five catalysts cited by S&P:

  • Near-Zero Interest Rates: The U.S. Federal Reserve says it will hold rates down near zero through 2015, which led S&P's Larkin to state that "we see no opportunity cost for buying and holding gold anytime soon."
  • Low Supplies: Global gold production has actually been flat for a decade – with mining output having risen at a compound annual rate of only 0.6% from 1999 through 2011. And Larkin doesn't see that changing, noting that "we believe production will remain stagnant for the next several years, as old mines are becoming depleted and are not being replaced to the extent needed to significantly lift output."
  • Volatile Currencies: Volatility in the foreign-exchange ("forex") markets will drive gold demand, with investors viewing the yellow metal as a relatively safe "store" of value and/or wealth. And Larkin says he believes that other countries will also begin to shift out of the U.S. dollar and into gold (which we actually tipped you off about back on Oct. 29 and Nov. 2).
  • Quantitative Easing: With the Bank of Japan (BOJ) the latest of the central bankers to deal themselves into the stimulus game, gold is bound to rise. (In fact, the BOJ is expected to abandon its 0.1% floor on short-term interest rates – and will pledge to buy assets until a 2% inflation rate becomes a realistic target. Some pundits said it could take "an obscene amount" of stimulus to reach this goal.) Given this and other initiatives like it, S&P believes "gold will rise in all currencies due to the implementation of quantitative easing by central banks worldwide," Larkin wrote.
  • The "M-2" Factor: Inflationary pressures will flow from the U.S. market, too, thanks to an expansion of the U.S. monetary base and M-2 money supply. And that resumption "of strong money-supply growth will boost the gold price," Larkin wrote.

Peter has cited these before, so it was no surprise to have him agree with the points made by S&P's Larkin.

True to form, Peter offered several others – telling me that he wanted to make sure that Private Briefing subscribers "have more than what is in that [S&P] report."

Peter added these three additional points to consider:

  • The sentiment for gold equities is in the dumps, and the HUI/Gold Ratio is near extreme lows. For that ratio to even be close to the lows it hit back in the 2008 stock-market panic is a fantastic Contrarian indicator, Peter told me. "This means that gold equities are nearly as cheap, relative to gold, today as they were back then," Peter said. "And consider this: Between that sell-off, and the most recent bull-market highs of September 2011, the HUI exploded into a rally of more than 300%. When the HUI/Gold ratio is near extreme lows, it's typically time to buy, since selling appears to be exhausted. That's why it's a Contrarian indicator."
  • We've got a major central bank – Germany's Bundesbank – that recently announced it would repatriate a large portion of its gold held with the Fed in New York and at the Banque de France in Paris. This underscores that investors – big and small – increasingly want to hold their own gold, meaning the available physical supply (already tight) is likely to keep shrinking.
  • Gold and silver tends to do well after an election. Indeed, a recent study by U.S. Global Investors shows that, in post-federal-election years, the Philadelphia Stock Exchange Gold and Silver Index experienced significant gains.

Peter has been recommending the Market Vectors Gold Miners ETF (NYSE: GDX) and the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) as two of the best ways to profit from cheap mining stocks.

S&P's Larkin has made the same recommendations. GDX offers the best way to access gold stocks through ETFs. But the junior miners ETF – offering exposure to 81 small-cap and mid-cap gold-and-silver minders – might offer the most upside, since those are the firms with "greater production and growth potential."

They're also more likely to be takeover targets, Peter says.

Two miners to consider are Newmont Mining Corp. (NYSE: NEM) and Barrick Gold Corp. (NYSE: ABX), Peter told me.

"One of the ones that I like is Newmont," he said. "It has a very good dividend yield of nearly 3.2%. It's well-diversified geographically. The stock has gone sideways for a very long time and now the company is making a very concerted effort to keep its costs down."

Then there's the Toronto-based Barrick, the world's biggest gold producer.

"Barrick, like other miners, has seen that investors are not exactly thrilled with the performance of their shares," Peter explained. "The reason for that is that the company spent a number of years just growing its reserves. But it did so by using its own stock as currency to buy the smaller companies that we talked about earlier. That was very dilutive."

[Editor's Note: We recommend investors employ a "trailing stop" of 25% on all holdings.]

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