Finally the deadwood press is starting to notice that gold is reaching nominal record highs while silver is racing ahead. Admittedly silver still has a way to go to catch up gold in terms of relative historic underperformance. As I recently revealed, David Lenigas is planning to launch a gold shares investment company on AIM. That the old charlatan has moved from pot to gold tells you where the action is at. But is this a bubble as was pot? We called the pot bubble, is it time to start lining up your gold shorts?...
Admittedly, shares in some very low quality gold plays such as technically insolvent Conroy Gold & Natural Resources (CGNR) have raced ahead in recent weeks but do not get too excited. Gold shares are the operationally geared plays on a rising price of the yellow metal and so in a really hot market, a top of the cycle market, shares would be significantly outperforming gold. There are good reasons not to hold shares rather than physical. At the top of the food chain the managers of the majors often destroy value via M&A, at the bottom of the food chain in this sector… well let’s just say that Mark Twain was not entirely unfair in his description of a gold mining operation. Not that most juniors will ever, actually, do any gold mining. But in a really hot market, a bubble set to explode, such considerations are cast aside as greed drives buying gold shares aggressively. We are clearly not there yet.
Is gold set to top out? While around all time highs from a decade ago, in inflation adjusted terms, gold needs to head well past $2,000 to beat either the all-time high level or, indeed, the $800 seen in 1980. There are good reasons to drive gold (and silver) higher: economic bad news in the form of the worst recession in decades, the threat of inflation to follow and the debauchment of fiat and also a return to cold war terrors with China taking over from Russia as the bad guy. Don’t try to tell anyone on a campus today but America really is, as it was in the last cold war, the good guy. But all of this is a heady cocktail for gold and so, albeit not in a straight line, I see it having further to go.
And despite the deadwood press finally waking up the exposure of most investors, and I include institutions as well as retail, to gold is somewhere between sod all and none at all. Back in the last bull market generalist funds were buyers of gold stocks in the final stages. They called it badly having resisted the urge to buy all the way up but in the end they capitulated. With hindsight, that was a sign that we were near the top. There has been almost no such capitulation by either retail or institutional investors to date. Retail lunacy is still in the area of Covid testing or cures and institutions are showing similar tendencies. So, for once, David Lenigas is jumping on a bandwagon which is only just starting to pull out of the station. The time to start jumping off that bandwagon is just before it hits full speed and we are not even close to that yet. There will be not some but a lot of daft valuations among gold plays at some point. Maybe it is worth watching a few perennial failures and looking for the big ramp ahead of the next opportunistic hugely discounted placing. But even that has risks in a sector that is picking up momentum. I am not adding to my gold holdings but they are already material to me and are well publicised. This is no time to bank profits, let alone consider a short in this sector.
This article first appeared on the N50 website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website for a share tip from Tom & Steve out last Friday and a new shorting piece this week click HERE
Filed under: gold, Amanda Solloway MP, Versarien, Next plc, Microsaic Systems, Trainline, N50 website
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