Investors are about as interested in gold as the public is in buying Halloween costumes on November 1st. Here’s what it means to those paying attention…
by Jody Chudley of Daily Reckoning
For Halloween this year both of my daughters went as students of the Hogwarts School of Witchcraft and Wizardry.
That is from the world of Harry Potter in case you aren’t familiar.
In my house we are very familiar with Hogwarts… Both of my kids are obsessed with the books.
I love that Harry Potter has helped develop a passion for reading in an era were so many children are permanently glued to their electronics.
To continue to encourage that passion, I was willing to pay up for the proper Hogwarts Academy Halloween costumes. Here is what they ran me:
- Official Hogwarts Academy Robe — $50
- Official Hogwarts Academy Tie — $15
- Official Hogwarts Academy Magic Wand — $20
Tally that up and I spent $85 per costume. $170 between the two of them… Ouch!
Whatever happened to cutting two holes in an old bedsheet and going as a ghost?
Anyway… my kids had a great Halloween and I was also able to teach my kids something important about the world in the process.
Because on November 1st I took them back to the Halloween store where we had purchased their costumes. As we walked up to the store I directed their attention to the store windows which were covered in signs.
Can you guess what the signs read? I bet you can.
“50 to 70 Percent Off Sale — All Items Must Go!”
I think my kids understood the lesson. The time to get a great bargain on something isn’t when it is in hot demand. The time to get a great bargain is when nobody else is buying.
And the same lesson holds true in today’s stock market.
Let me explain…
High Quality Gold Mining Stocks Are Dirt Cheap
There is no disputing the fact that the global financial meltdown of 2008 was caused by excessive debt.
With that in mind, we should all be aware that today the global debt situation has actually gotten considerably worse.
The current total global debt figure stands at a record $247 trillion. That is an increase of $150 trillion from 15 years ago.1
What has changed is who holds the debt.
In 2008, the most excessive debt was tied to housing and the financial entities that financed the bubble. Today that debt has moved from housing and onto the balance sheets of governments around the globe.
As a result, every government in the world is now simultaneously trying to promote inflation because that is the easiest way out of this debt mess.
Which brings me back to the Halloween lesson that I taught to my kids…
Today, there aren’t many people worried about protecting their portfolios against inflation. Just like how on November 1st there aren’t many customers worried about buying a Halloween costume.
On November 1st I could buy Halloween costumes at more than 50 percent off. Today I can buy inflation protection — AKA gold — at a similar discount.
The iShares Global Gold Miners ETF (RING) currently trades at book value. That means that these companies are being priced for liquidation, as though they have no value as a going concern.
That is unheard of for an index. Even the strongest companies of this sector are being valued as though they are unprofitable, below average businesses.
But they aren’t.
44 percent of the iShares Global Gold Miners ETF is made up of four world class profitable miners. Those four companies are Goldcorp, Barrick Gold, Newcrest Mining and Newmont Mining. I dug into the financial filings of these companies and found that combined, they generated $7.5 billion in operating cash flow over their last full fiscal years.
Getting exposure to these companies at this valuation is a steal of a deal with current gold prices.
Better still is the huge optionality that comes with purchasing these companies at such a rock bottom valuation…
If inflation should really start to kick in as governments around the world try to ease their debt burden with inflation, the price of gold is going to rise.
When that happens, the cash flows and profits of these gold miners will soar because of the leverage that they have to the precious metal.
There is a sale in the gold mining sector and investors are not paying attention.
I think that they should. And the iShares Global Gold Miners ETF is a great and diversified way to take advantage of it.
Here’s to looking through the windshield,