Following two years of lackluster performance, the stage is being set for one mining stock’s return to glory…
Let’s first address the elephant in the room regarding gold’s future.
The number of people not giving gold a fighting chance has grown dramatically since prices topped out in the fall of 2011.
Then when the Fed announced it would taper its asset-purchases and essentially take away the punch bowl in 2013… the news made gold an even less attractive investment.
But there’s strong evidence that prices may have finally bottomed out. In fact, gold bugs including myself are calling for a rebound that could begin as early as this year.
A prime example was a few weeks ago when a second major Fed tapering was announced.
You see, the trimming of another $10 billion in bond purchases was widely anticipated to be another serious blow for gold sentiment. Instead, the move had little to no adverse impact on prices.
This means that investors had already anticipated the Fed action and priced in the impact of the tapering before the announcement was made. What’s even more likely is that investors have also priced in future announcements as well – meaning gold prices today reflect the completion of Fed quantitative easing.
Now here’s where things get interesting.
Although the Fed’s aggressive monetary policies forced interest rates to zero, there’s been no runaway inflation.
To achieve this little miracle, the Fed used a bit of trickery.
You see, when the Fed buys Treasury bonds or other assets like mortgage-backed securities, it creates “reserves” for the commercial banks, which the banks deposit at the Fed itself.
Prior to 2008, this money earned no interest, so banks would lend money out until the resulting growth of deposits used up all of those excess reserves. Of course, increased deposits means an increase in the money supply and thus, inflation.
But after 2008, the Fed began paying interest on excess reserves. Banks therefore only had an incentive to lend only if the return would be greater than the interest from reserves.
In essence, the Fed has so far been able to pump liquidity into the system and control the rate of inflation in the economy at the same time.
But notice how I just said “so far.”
You see, when former Fed Chair Ben Bernanke took office in 2006, the Fed had $834.6 billion in assets, the vast majority of which were US Treasuries.
The Fed now holds around $4.1 trillion in assets, with much of the balance sheet consisting of questionable debt such as mortgage-backed securities.
That’s a LOT of liquidity in the banking system that will eventually need to be withdrawn.
The Fed is only beginning to experiment with a tool called reverse repurchase transactions or reverse repos to pull liquidity temporarily out of the system. Reverse repo transactions allow banks to lend the Fed cash overnight at a fixed rate in exchange for borrowing Treasuries.
But these tools are largely unproven and are still in the experimental phase. If they don’t work as hoped, the economy could be in for a very rude awakening.
And what’s worse is, there are signs that the Fed is losing its “control” over inflation as well. While CPI was held to 1.5% in 2013, monetary inflation in the past year was up 4.9%, according to Forbes – even with tapering.
Meanwhile, demand for physical gold remains robust.
The People’s Bank of China bought over 2,500 tons of gold last year, which was more than the entire volume of gold mined globally in 2013.
All this points to pent-up bullish momentum for gold.
Top Gold Stock To Buy Today:
Although the gold mining stocks have been ugly for a long time now, I believe that things are beginning to look up.
Such is the case with Canadian miner Yamana Gold Inc. (NYSE:AUY).
Their Q4 2013 earnings were recently released, and results were positive despite adverse market conditions.
Yamana produced 1.03 million ounces of gold and 8.4 million ounces of silver for total gold equivalent production of 1.2 million ounces. The company also had all-in costs of $935 per ounce (which was reduced to $754 an ounce on a by-product basis.
These are solid numbers.
By comparison, Goldcorp produced 1.9 million ounces worth of gold that cost the company $1,136 per ounce.
With gold at $1,250, margins for Goldcorp are razor thin.
Yamana is also aiming to deliver up to 1.7 million ounces per year within the next few years — growth of 59%. Producing those extra 0.6 million ounces would have a huge impact on Yamana’s balance sheet.
On the other hand, in order for Goldcorp to see similar growth, they would need to crank out an additional 1.5 million ounces annually — a monumental task in today’s market climate.
And while Yamana registered a net loss of $446 million ($0.59/share), there was a $574 million impairment charge the company took in respect to certain mineral properties. This could be reversed when gold prices rise.
The bottom line is that it looks like the sun is about to rise again on gold stocks. The time may be now start staking positions in companies like Yamana Gold.