For smart investors watching the gold-Dow ratio rather than mainstream media headlines, this is an exciting time to be a precious metals investor. The world seems to be conspiring to push the price of gold higher, with continued zero interest rates, Chinese stock market volatility and more unrest in the Middle East.
In this interview with The Gold Report, Gold Stock Trades Editor Jeb Handwerger lays out his short list of junior mining companies that have been actively adding value, and that will be in demand when all eyes are on the sector.
The Gold Report: In your last interview with The Gold Report, you said that a Federal Reserve interest rate hike would be the best thing for gold. As we now know, the board decided to keep rates at almost zero. How does that impact your projections for precious metals?
Jeb Handwerger: It was almost a done deal that the Fed was going to raise interest rates in September, but then the Chinese market began to crash and just the threat of raising interest rates caused a price decline in the S&P 500, the likes of which we haven't seen in a long time. It was a record drop, breaking a major four-year uptrend and forming a technical bearish pattern.
The Fed announced on Sept. 17, when it was expected to raise interest rates for the first time since 2006, that it is uncertain about the economy, that the equity markets are too volatile, and that there are too many dangers of another recession. Now the Fed is doing whatever it can to prevent a recession.
The global stock markets are beginning to roll over, something I predicted in that same interview, due to fear of a rate increase before the end of 2015. The reality is we have a slowing global economy with the threat of higher interest rates, and that sparked a rally in the precious metals. The gold-Dow ratio is now beginning to turn in favor of precious metals, which are once again seen as a safe haven to preserve capital and protect against markets that are completely overinflated and experiencing record volatility.
That is why I have always advocated for a diversified portfolio, including precious metals commodities and high-quality junior mining equities. I would not be surprised to see gold at $1,600/ounce ($1,600/oz) and the S&P 500 at around 1,600 before the end of the first half of 2016.
The bottoming process for the juniors could be taking place now, after a seven-year decline. All of these factors make this a phenomenal time to find assets not correlated to the stock market, the bond market and the U.S. dollar. The best assets inversely correlated to those things are precious metals commodities and junior miners.
Now, the junior miners are even cheaper than they were in the late 1990s, when gold was below $275/oz. This could be a once-in-a-lifetime value proposition that may not last much longer. The safest havens during these periods of deleveraging are assets trading near their intrinsic values or at liquidation levels, which we've seen. Many of these miners are trading even below their cash values.
The U.S. stock market and the U.S. Treasury markets went straight up for more than four years, boosted artificially by record low rates. They could be due for a possible 30–50% decline. The recent decline was just about 10%. Any rally may be short-lived until the markets return to realistic levels. As soon as that uptrend in equities is broken, we will see a massive rotation into the inversely correlated sectors, which include precious metals commodities and the gold juniors.
TGR: You're not the only one saying this. J.P. Morgan just called a bottom for gold. Are you watching the same indicators as the big investment banks?
JH: I'm not a fan of big-house reports. I usually look at them as a contrary indicator, but this could mean that the upturn has just become undeniable.
The key indicator I watch is the gold-Dow ratio. That is evidence that the trend may be changing. Investors need to look at the relationship between stocks and gold. When that ratio breaks down, it's better to be in precious metals.
I also look at the cycles. The decline really began in 2007. This is one of the longer declines, even factoring the bounce after the credit crisis between 2009 and 2011. Over this seven-year period, a drastic reduction in mineral exploration and development due to capital chasing social media and biotech stocks has caused a major shortage of mineral supplies.
The recent volatility and increase in the Chicago Board Options Exchange Index (VIX) will send investors back to the junior miners as a way to diversify out of overvalued stocks and bonds. That is why a portfolio of choice junior mining investments is more valuable than a statement might show today.
TGR: What kind of junior mining company can do well in this upward-turning environment you're describing?
JH: I look for companies actively drilling. I don't waste my time with companies that don't really have a game plan for building fundamentals and creating value for shareholders. You have to know the management team, and it has to have clear, set goals with news flow and guidelines.
TGR: What are some top stocks you're watching that fit those criteria?
JH: Integra Gold Corp. recently announced a major $14 million ($14M) investment from Eldorado Gold Corp. Integra is getting impressive, high-grade results from its current drill program. It is getting validation from a major mining company and major investors during a bear market. That's exciting.