Best Play for 2012: The Gold Mining Stocks

Over the past three trading days, gold bullion has lost roughly $100.00 an ounce. This correction is good medicine! The speculators who got into gold late are being taught a lesson. The weak money is leaving gold. This is exactly the type of healthy correction in the 10-year bull market in gold that I’ve been waiting for!

Here are some important words from my esteemed colleague, and resident gold expert and historian, Robert Appel, BA, BBL, LLB:

“After the gold mining stocks had been overvalued in 2008 and 2009, they went the other direction for 2010 and 2011. In fact, on a relative basis to their assets, going into fall 2011, gold mining stocks were selling at 30-year lows. To put that in perspective, if you are, for example a 50-year-old investor, you have only seen these sorts of bargains on gold mining stocks once previously in your entire life.

“Much of the ‘fast cash’ went into the ETFs, because they are quick, they are liquid and they allow investors to avoid the drama queens who often run the mines. In the past, many gold mining companies had treated their shareholders like garbage. The year 2011 was payback for the gold mining stocks. And this in spite of the fact that serious issues have been raised as to whether many of the gold ETFs actually have the gold they claim, and as to whether these same ETFs are used by the Big Boys to ‘manage’ their shorts.

“The hedge funds found a ‘play’ that worked—buy gold and sell the gold mining stocks. Now, we need to take a moment and try to understand how these guys think. If you told a hedge fund manager that a comet was approaching earth and we had only hours to live, they might produce this hedge—buy companies that sell survival gear, sell the credit card firms and the banks. The fact that this hedge might only work for a few hours (until the world ended and the comet struck) is simply not on their radar (pardon the pun). You don’t get to be a hedge fund manager by looking at the big picture; all you care about is the short term. So, short-term, the gold mining stocks were (and still are) whacked. In fact, many gold mining stocks are selling below asset value!

“Finally, the gold mining stock ‘whackers,’ as we like to call them, those privileged brokers who clandestinely represent the western central banks, smelled the blood in the water. especially since the mess in Europe created a liquidity crunch late in the year, just at a point where it seemed, briefly, that the gold mining stocks were just about to take off as promised. With the help of their pals on the regulatory side, margin requirements for gold traders were raised under conditions where, usually, just the opposite happens

“Result? They whacked the gold mining stocks like they were playing whack-a-mole. This in spite of shortages; in spite of the lack of new finds; and in spite of the fact that their own clients, the central banks, were net buyers for the year, after years of dumping gold.

“Bottom line? We do not believe these conditions will prevail for 2012. In fact, we expect a reversal. We say buy or accumulate gold mining stocks at bargain rates. That is the best play for 2012. We maintain our call for gold to ultimately level out at around $2,400 an ounce after spiking much higher first. And we note that the recent announcement from Japan offering gold/silver backing for their bonds is the start of a trend, and in time will not be seen as a unique event.” (Also see: Eleventh Consecutive Year of Higher Gold Prices a Shoe-in.)