Monetary metals correction got you down? Cheer up: the odds favor some very good news for gold and silver bugs going into this fall.
Producer earnings should be stellar, while most other sectors are hoping to deliver “not as bad as feared” results.
In my article last month on indicators for when the top is in for monetary metals, I included a version of this chart as evidence that the market had not yet peaked. I was right about that, but I also said it shows that gold stocks were still relatively cheap, compared to the metal itself.
My point today is that this is still true. Yes, many gold and silver stocks are up sharply this year. Some have hit all-time highs. But overall, they’re relatively cheap compared to the metals.
If I’m right about the excellent odds for record-breaking earnings for Q3 2020, we should see share prices rise, even if gold and silver themselves trade sideways for the rest of the year. As I type, gold is trading above $1,950 per ounce and silver above $26. These are great prices for companies that were already making money at much lower levels just last year.
Key Point: Gold and silver producers don’t need higher metals prices to deliver record profits—the better ones are seeing record cash flow now.
Average results for Q2 would have been even better without the COVID-19 shutdowns. I don’t think that we’ll see shutdowns on the same scale this quarter, even if there is a second wave.
This means that phenomenal Q3 results could hit the market even as fear regarding other market sectors is surging.
And Mr. Market is paying attention. Gold and silver are no longer a contrarian play. The metals have been making headlines for weeks, attracting generalist interest for the first time in many years—even among young Robinhooders.
One more thing. The earnings tailwind I expect applies only to producers, obviously. But most producers aren’t discovering as much gold and silver as they are mining. That means they have to take over the smaller companies that have economic deposits—it’s either that or they mine themselves out of existence.
A tsunami of takeovers in the gold and silver sector is the works, which means the situation is bullish for all companies in the space, all the way down the food chain to junior explorers.
This makes it great news for those still looking to buy that many great gold and silver stocks retreated with the metals this week.
Could I be wrong?
Of course. I don’t pretend to have a time machine.
For the scenario I’m outlining not to play out, gold and silver would need to drop much lower over the months ahead. If investors become convinced that monetary metals have peaked and it’s all downhill from here, my thesis about Q3 earnings will be wrong.
I don’t think this will happen. If anything, I worry that gold and silver will break out again before I can buy more.
Another possibility would be that there’s another major waterfall event that takes all stocks down. Gold and silver stocks are still stocks, after all. We’ve seen them get whacked in broad market meltdowns this year and before.
If this were to happen, it would create terrific buying opportunities for those still looking to go long (or longer) gold and silver stocks. It could be the last great buying opportunity before the real mania phase of this market begins.
But I can’t guarantee there will be another market meltdown this year.
Meanwhile, gold and silver stocks should do well this fall even if the metals themselves remain in consolidation mode.
And, of course, if the metals take off again, they’ll do even better.
If you’re a gold and silver bull, as I am, that’s opportunity knocking.
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