It’s good to write to you again, after taking a few weeks off for the Cowie family holiday in sunny Queensland. It was great to warm up under that big bright light in the sky that we don’t see much during a Melbourne winter!
I’d planned to cut back on my Diggers and Drillers weekly updates while defrosting, but Mr Market was busy while I was away, and so I ended up writing some of my biggest updates in months.
Probably the biggest news in the last few weeks was the well overdue rallies in gold and silver. About half of the D&D tips are precious metals stocks, and most of these have been travelling nicely in recent weeks.
Gold’s recent move has been astounding. Since the start of September it has surged 8.8% from US$1600 to hit US$1742 last week. The last stock I tipped is a gold producer and is sitting on a 19% gain in less than a month.
Gold – Finally Following the Script Once More
I thought a rally in gold was on the cards, which is why I tipped a gold stock in August. But I must admit I didn’t expect it to happen so fast.
Go Time For Gold
The thing that alerted me that it was almost ‘go time’ for the gold price was that it had gone nowhere for 12 long months. The few times this has happened in the last ten years, gold has then put in a ‘catch up year’. By this I mean that in the following 12 months, gold puts in roughly twice its typical annual performance.
This may sound overly simple but historically it stacks up.
The average annual gain over ten years for Australian dollar gold has been 10.7%. So if the ‘catch up year’ started in mid August, I estimated that Australian dollar gold would reach A$1884 by about August 2013.
Some of my readers thought that was a wild prediction when I published it in August, but as of today, we’re already well on our way to the target.
The fact is that the gold price can’t hover forever when all the forces that drove it up for the last 12 years are still in play.
Consider that the market is as risky as ever, geopolitical risk is still very high, central bank balance sheets are ever expanding, real interest rates are negative, AAA rated bonds are at record lows, mine supply is flat (as is scrap gold supply), soaring Chinese buying, and growing net central bank buying…the list goes on.
That was an explosive mixture for gold to resume its 12 year bull market.
It just needed a spark.
This came in the form of the increasing chance of more money printing from both the Federal Reserve and the European Central Bank.
Well, that could be about to happen. And the most remarkable thing is…
The two most powerful central banks in the world might do it at the same time.
This possibility makes it one of the most exciting weeks of the year for gold and silver investors. Whenever these central banks increase their balance sheets, precious metals prices soar.
On the flipside, it also makes this a risky week. The one certainty in these markets is that nothing is certain. I wrote the following to Diggers and Drillers readers last night:
‘The pressure has been building, but of course, the trigger for the price action has been the expectation of more stimulus from both the Fed and the ECB. The market was asleep in August, as it is a popular time to take a break in the US and Europe. But fund managers and traders are wide awake now that September is here. Their eyes will be closely watching two bits of news this week.
‘Firstly, on Wednesday the German constitutional court rules on the challenge to the European Stability Mechanism. If they don’t rule against it, then gold and silver’s rally will take a big hit because Mario Draghi’s plans for unlimited bond purchases by the ECB will be dead in the water. The decision is binary and the stakes are high.
‘Then on Thursday night, the Fed releases a statement and holds a press conference. Bernanke spelled out last month that more stimulus could be on the table if the data supported it. Last week’s jobs numbers were lousy, so the market is now betting on the Fed announcing a third round of quantitative easing (QE3) to be announced on Thursday.
‘So quite possibly we get a positive announcement from both central banks in a single week.
‘My view is that if the Germans clear the decks for Draghi’s unlimited bond purchases, then we will see the Fed announcing QE3 as well. Both central banks have been building the rhetoric for endless months. And as this chart shows, historically the two central bank balance sheets have grown roughly in tandem.
ECB’s balance sheet and the Fed’s grow together
(figures multiplied by a million)
Click here to enlarge
‘Of course, we could get nothing from either central bank.
‘And we’ve certainly had no shortage of fruitless hints and central bank hype already this year. More of the same would not surprise me.’
Gold Stocks Are Cheap
That makes this week a high risk, high return time for taking a position in precious metals and precious metals stocks. A double whammy from the two central banks will fuel the existing rally, but nothing from either will see a pullback.
Something else that has been good to see in the last month is that prices of some of the best quality gold stocks have actually risen faster than the gold price.
This ‘leverage’ means that with the right gold stock, you can amplify the gains in the gold price. For example, as with my last gold tip, if gold rises 9% then the stock price rises 20%. It’s been a long while since we’ve seen this – and gold stocks are so outrageously CHEAP right now, there is space for them to keep giving investors this kind of leverage to gold for years.
So…not only is gold resuming its bull market, but gold stocks are starting to offer leverage to it too. And with a strong chance of central bank stimulus any day now, I think we may now just be looking at the holy grail of set-ups for gold stock investors.
It has been a long time coming!
But it should be well worth the wait.
Dr. Alex Cowie
Editor, Diggers and Drillers
Powered By DT Author Box
Written by Dr. Alex Cowie
Dr Alex Cowie is Money Morning‘s Chief Resources Analyst. (To have his newest investment ideas delivered straight to your inbox you can subscribe to Money Morning for free here).
He is also the editor and chief analyst for Diggers and Drillers — Australia’s premier resource stock advisory service.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Alex on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.