After a more than 50-year bear market in gold stocks, things are coming together to create virtually perfect conditions for gold stocks.
Gold prices are at (or near) all-time highs in most currencies, and will likely continue to rise over the coming years. Commodity prices are at lows and still falling. Deflationary pressures are enormous and will likely persist for years to come.
Due to these almost perfect conditions, margins for gold miners are looking great and will likely continue to get better. Below, is a long-term chart of Gold/CRB and the HUI:
If we were to use the Gold/CRB(commodity index) ratio as a proxy for profitability, then we can see that there is a big difference between current (potential) profitability for gold miners and profitability during the period from 2001 to 2008 (1st phase of gold stocks bull market).
During the period from 2001 to 2008, the HUI (index for gold miners) increased more than 18-times in value. Given the big difference in potential profitability, from the chart above (5.77 to 16.51 vs 1.3 to 2.54), it is likely that the HUI will increase far more than 18-times over the coming gold stocks bull market.
Yes, there are other production costs (such as labour) that are not factored into the CRB index, but even these will be under enormous pressures due to the massive deflationary pressures that will likely persist over the coming years. So, they are unlikely to decrease profitability by much, if at all.
Recently, the markets likely flashed a very important signal to confirm the coming gold stocks bull market. You can read more about this signal in my previous article. A carefully chosen gold stocks portfolio at this time will be a great defence during these trying times.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.