Projection of $5,800 gold and what it means for juniors

Lorimer Wilson
0 Comments|October 20, 2009

Are+5,000% gains possible?

The only bull market we can compare the current eight year rise in the price of gold to is the 10-year rise in the 1970s. The Aden sisters, Mary Anne and Pamela, have extrapolated the future price of gold using the same growth rate as in the ‘70s and applied it to the current bull market and reported their findings in their latest Aden Forecast. They determined that if one were to compare the bull market’s second rise from 1976 to 1980 to the current bull market we could see gold eventually reach $4,100 during the next run-up. They further reported that if one were to take the entire bull market gain in the 1970s at 2,300% and extrapolate it to today’s situation then $5,800 would be the equivalent upside target.

The Adens concluded that “with today’s bull market being far more global in scope compared to the 1970s, we could eventually see these much higher gold price targets realized. This is especially so factoring in that gold’s peak in 1980 at $850 is the equivalent of about $2,400 in current dollars. Gold has not even approached that level yet and the situation is far more serious now than it was then.”

And silver? “Silver is more volatile than gold. It fell more than gold last year, and it has risen more than gold this year (See table below: silver +55% vs. gold +19% YTD). This makes sense because silver is both a precious and a base metal. To foresee silver’s potential compared to gold, look to copper as a guide. Copper is a good barometer because it rises during times of global economic growth. That is, when you see both gold and copper rising together (See table below: gold +19%; copper + 95% YTD), then silver will most likely be stronger than gold… If global growth remains on a positive track, we will continue to see silver outperform gold.” And such is holding true today.

I mentioned in my previous article “Can Gold and Silver Equities Expect +5,000% Returns Again?” that gold and silver stocks realized absolutely amazing gains in the 1970s with several increasing in excess of 50,000% - yes, 50,000%! - as gold skyrocketed in price from $35 to $850 per ounce. And that was gold stocks not the warrants of gold mining/royalty companies that perform dramatically better than their associated stocks (more on the secret of leverage later in the article). So what can we expect in the price of gold and silver equities should we indeed see $4,100, let alone, $5,800 gold prices in the near future?

Well, the stocks of the 22 companies (five large-cap; three mid-cap; two small-cap and 12 micro/nano-cap) in our proprietary Gold/Silver Companies with Warrants Index (GCWI) have appreciated by 215% from their 52-week lows in 2008. In addition, the 24+ month duration warrants of those 22 companies (26 in total) in our Precious Metals Warrants Index (PMWI) have already gone up 445%. That is correct: 445%. During the same period gold has gone up 49% from its low of $705. Talk about leverage. That represents a 4.4 times greater increase for such stocks and 9.1 greater increase for their associated warrants. Very impressive!

As the table below shows, the average large cap gold and/or silver mining/royalty company, as represented by the HUI, is up 2.5 times that of gold bullion YTD while the micro/nano cap companies, as represented by the CDNX, are up five times that of gold bullion YTD. Carrying that comparison one step further, those gold and silver companies with warrants (GCWI) are up almost four times that of gold bullion YTD and their associated warrants (PMWI) up by almost six times that of gold bullion YTD. Therein lays the advantage of investing in the shares and/or warrants of gold and silver mining/royalty companies rather than in the bullion itself.

Last Week’s % Performance (1)

All calculations are based on U.S. dollar equivalents

(2) Week ending October 16th, 2009

 (3)HUI is the symbol of the AMEX Gold BUGS Index consisting of a Basket of Unhedged Gold Stocks. It is a modified equal dollar-weighted index of 15 large/mid cap gold mining companies that do not hedge their gold beyond 1.5 years.

(4)GDM is the symbol for the NYSE Arca Gold Miners Index. It is a modified market capitalization weighted index of 31 large/mid/small cap gold and silver mining companies.

(5)CDNX is the symbol for the S&P/TSX Venture Composite Index. It consists of 558 micro- and nano- cap companies of which 44% are engaged in the mining, exploration and/or development of gold and/or silver and other mineral resources and 18% in oil or natural gas pursuits.

(6)CCWI represents the Commodity Companies with Warrants Index. It is an equal dollar-weighted index consisting of 36 commodity-related companies with warrants of at least 24 months duration outstanding trading on the Canadian and U.S. stock exchanges.

(7)CWI represents the Commodity Warrants Index. It is an equal dollar- weighted index consisting of 47 warrants of at least 24 months duration associated with the 36 companies in the CCWI.

(8)GCWI represents the Gold/Silver Companies with Warrants Index. It is an equal dollar-weighted index comprised of the 22 gold and silver mining and royalty companies with warrants in the CCWI.

(9)PMWI represents the Precious Metals Warrants Index. It is an equal dollar-weighted index comprised of the 26 gold and silver warrants, of at least 24 months duration, found in the CWI.

Sources: preciousmetalswarrants.com (warrant and stocks-with-warrants data), oanda.com (exchange rates) and stockcharts.com (index and commodity prices).

 

Advantage of owning precious metals mining/royalty stocks instead of the bullion itself: Leverage

If gold, for example, were to escalate considerably in price (i.e. to $2,000, $3,000, or even more) in the next few years it would have a significantly positive impact on the profitability of the companies who mine it and the royalty companies that buy it from marginal producers. For example, with gold priced at $1,000/oz., and the cost of production at perhaps $600/oz. the gross profit margin of gold mining companies would be 40.0%. If two years from now, however, gold were to increase to $2,000 and the cost of production were to increase by only 20% to $720/oz. then the mining companies’ gross profit margins would have gone up from $400/oz. to $1280/oz., or 220%.  

That’s called leverage and historically, in a rising market, the ratio for gold and silver mining/royalty shares vs. physical gold ranges from about 2.5:1 for large-cap gold and silver mining/royalty companies on average to as much as 5:1 for smaller cap gold and silver mining/royalty companies, on average, (currently up 4.4:1 from its 52-week low) and even 10:1 in exceptional circumstances for certain truly outstanding performers. All the more reason to do your due diligence to find and invest in those gold and silver mining and/or royalty companies with the right mix of capable management, strong financing, major resources and geographically and politically well-located properties to reap the major benefits a surge in the future price of gold and silver will present.

The added advantage of owning the right warrants of the right precious metals mining/royalty companies: Leverage-on-Leverage

For those who buy the right long-term warrants associated with the right gold and silver mining and/or royalty companies at today’s still undervalued prices, your eventual returns would likely be 1.5 to three times greater (currently 1.5:1 YTD for the Precious Metals Warrants Index – PMWI - vs. the Gold/Silver Companies with Warrants Index – GCWI) on average than had you invested in their associated stocks. For companies whose warrant prices go through the roof with extraordinary gains, in and of themselves, or from extremely depressed values, as experienced in 2008, that ratio could represent a ratio as high as 10 times greater than having invested in the metal itself (currently up 9.1:1 from its 52-week low).

Such over-and-above gains are referred to as leverage-on-leverage or doubling-up on the leverage factor. The catch is, however, that you have to know whether or not the warrant associated with the stock you are interested in buying is the right warrant, i.e. has a leverage/time value sufficiently high enough to justify its purchase given the anticipated appreciation in the price of the associated stock. For those who don’t have a clue what a warrant is, which companies have them, which have the best values and exactly how to go about buying them check out the Precious Metals Warrants site hyper-linked below.

Conclusion

If gold were, in fact, to increase from its current $1050 or so to $5,800 that would represent an increase of 452%. The current leverage exhibited by the component stocks of the HUI is 2.5:1 vis-à-vis gold. Were that leverage applied to future gold and silver mining/royalty company equity prices it would extrapolate into an average price increase of 1130% for such large-cap stocks.

Applying the current YTD performance of the GCWI, which is outperforming gold bullion by a 3.9:1 margin, one could anticipate an average increase of 1,760% (452x3.9) in the average stock price of gold and silver mining/royalty companies with warrants. The component warrants in the PMWI have out-performed the price of gold by a margin of 5.9 to 1 YTD, which would suggest that the average warrant could expect to increase by approximately 2,668% (452x5.9) were gold to escalate to $5800. And that is on average. Indeed, if the trend to date from their 52-week lows were to continue the projected 452% increase in gold would extrapolate into a 1989% (452x4.4) increase in the price of the average precious metals mining/royalty stock and an amazing 4,113% (452x9.1) in the price of the average warrant.

Certain junior mining/royalty companies will hit the mother-lode and experience dramatically greater increases in their stock prices than the average and the leverage-on-leverage benefit of warrants should cause some of the right warrants of the right mining/royalty companies to experience 5,000% or more. So “Does the Adens’ $5,800 Gold Projection Suggests +5,000% Gains in Junior Equities?” In some cases it appears so. 

Contact me at Lorimer@preciousmetalswarrants.com with questions and comments. I promise a reply. Don’t be shy - drop me a line or two.

Guest Contributors are welcome – just send me a draft of your proposed article for consideration. That’s how I got started. It is a very enjoyable and stimulating activity. 

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