We recently attended a two day mine tour of a publicly traded company. We anticipated that the atmosphere would be full of enthusiasm because of gold's recent breakout above $1,000. Yet, the mood was completely neutral and discussions about gold were nearly non-existent. We came away with a number of conclusions about gold, all of which support the prospect for a higher price in the near future.
The attendees included several members from the company's management team, a handful of sell-side equity research analysts, and just a few investors, including the two of us. Is gold a bubble yet? We don't think so as investors were few and far between at this mine tour. As the housing bubble was peaking, homebuilder conferences and company events were overrun with investors and short sellers. As that bubble began to burst, wide participation from both bullish and bearish investors surrounded the housing market and signified that a top was near. The low participation from buy-side investors is a sign that we are not at the top of the current gold bull market.
Another interesting aspect of the meeting was that the majority of research analysts were from outside the United States. Perhaps this explains the lack of enthusiasm we witnessed regarding the price of gold. For example, Canadians and Australians do not have currencies that are being undermined and thus have little need to find an alternative currency such as gold. Ultimately, as gold appreciates against the Dollar, it is likely that US equity research houses will intensify their focus on the gold mining industry while at the same time reducing coverage in sectors seeing a likely decline in investor interest, such as housing, commercial construction, banking, retail, etc.
Third, there were very few discussions about what gold mining stocks people owned or stories about stocks people sold too early or should have purchased. These were the kinds of stories that were so common for technology and internet stocks during the NASDAQ bubble of 1999 and 2000. These cocktail party stories always occur at market tops and everyone should be aware that when the focus of these stories turns to gold miners, then it is time to be cautious. However, the absence of such stories suggests that people are underinvested in gold.
Gold will always have its short-term fluctuations catalyzed by market rumors, commentators, fear, and of course, greed. These gyrations in short-term trading are normal for all markets and especially precious metals. For example, there have been times during the current gold bull market when Cash4Gold commercials filled every CNBC slot and CNBC dedicated large amounts of air-time devoted to gold. Those periods of time have marked short-term tops for gold. However, gold has move higher after each correction. This is justified given the over-ownership of Dollars and under-ownership of gold by citizens and central banks at the very time the Federal Reserve is overtly printing money to create inflation.
Given no signs of an end to the secular gold bull market prior to our trip, the lack of enthusiasm for gold that we witnessed suggests that mainstream investors have barely begun to invest in gold.
