Gold Bottoms as Minors and Juniors Trade at a Discount to Inventory in the Ground

“The miscalculation by the troika in Cyprus has finally put the last nail in the medium-term short gold investment thesis.

For just over 18 months, the central banks have coordinated, very effectively, to build an edifice of confidence in the global financial system that would allow the idea that quantitative easing would no longer be needed to finish the job of cleaning up the mess post-Lehman Brothers. The troika, and most explicitly, the IMF, overplayed their hand last weekend with their demands for explicit looting of savers in order to go forward with a rescue plan for Cyprus’s over-leveraged banking system. Read Minyanville’s “Cyprus: An Inconvenient Truth (or, How Not to Manage a Debt Crisis).”

This act and the subsequent chaos it has spawned has now firmly put in place a bottom in the price of goldGLD +0.18%  . Regardless of the final outcome in Cyprus — exit from the euro zone, acceptance of the bail-in, civil unrest, etc. — the net effect will be a steady loss of confidence in the banking system, capital flight from both the U.S. and the EU and greater movement into gold as a vehicle for savings and wealth preservation.

While I would have preferred a close above $1620 per ounce this week, closing above $1600 as we approach the end of the month is strength enough given the current sentiment.

At this point both the mining sector and the junior exploration sector are trading at or near discounts to the assets they have in the ground or will prove to have with just a modicum of investment capital. Between rising energy costs, poor management of resources by the major miners, and a moribund underlying commodity price, there has simply been no demand for these high-risk — and up until the events in Cyprus, low-return — stocks. Read Minyanville’s “Facebook Vs. LinkedIn: Why Both Are Facing a Sticky Question.”

That, in my opinion, is about to change and the opportunity is ripe for a value investor to make a perfectly timed entry into a market that has been, frankly, beaten with an ugly stick.

Here are a couple of potential candidates for you to consider, one mid-level producer and an exploration play that I find intriguing…..”

 

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