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$4 Billion Golden Oppoerunity

What Gold Stocks Going To The Moon Will Look Like

Commodities / Gold & Silver Stocks Nov 29, 2011 - 01:39 PM GMT

By: Jeff_Clark

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleJeff Clark, BIG GOLD writes: This may sound sensationalistic, but I think the odds are very high that, on average, gold producers will sell in the $200 range before this bull market is over. With most of them trading between $20 and $40, the returns could be tremendous. And while the typical junior won't reach the same price level, their percentage returns will be much greater and potentially life-changing, as you're about to see.


The timing of this article may seem incongruous, given the recent weak performance of gold and gold stocks. But that was the identical situation in each of the past manias: both the metal and the equities didn't excel until the frenzy kicked in. The following documentation is actually a fresh reminder of why we think you should hold on to your positions – or start accumulating them, if you haven't already.

So, are my projections based on some fantastical gold price, or a complex formula for gold stock valuations? Nope. I base my projections simply on what gold stocks have done in the past. And to the surprise of many investors, it's a performance they've logged several times, making the following prices very believable if you're bullish on gold.

It comes with a warning, though:

Caution: the following tables may cause excitement, drooling, or the temptation to go all in. Read and invest at your own risk.

You've undoubtedly read about gold's spectacular climb in 1979-'80. And you've likely heard how well gold stocks performed in general. But most researchers haven't identified exact returns from specific companies during this era.

The reason? Digging up hard data prior to the mid 1980s, especially for the junior explorers, is difficult because it hasn't been computerized. So we sent a couple of researchers to the library to view the Wall Street Journal on microfiche. We also relied on Scott Hunter of Haywood Securities; Larry Page, president of the Manex Resource Group; and the dusty archives at the Northern Miner. (This means our tables, while accurate, are not necessarily comprehensive.)

Let's get started…

The Quintessential Bull Market: 1979-1980

The granddaddy of gold bull markets occurred during the 1970s decade, one culminating in an unabashed mania in 1979 and 1980. Gold peaked at $850 an ounce on January 21, 1980, rising 276% from the beginning of 1979. Yes, the price of gold on the last trading day of 1978 was a mere $226 an ounce.

Here's a sampling of gold producers from this era. What you'll notice in addition to the mouthwatering returns is that gold stocks peaked not until nine months after gold.

Returns of Producers in 1979-1980 Mania
Company
Price on 12/29/1978
Sept. 1980 Peak
Return
Campbell Lake Mines
$28.25
$94.75
235.4%
Dome Mines
$78.25
$154.00
96.8%
Hecla Mining
$5.12
$53.00
935.2%
Homestake Mining
$30.00
$107.50
258.3%
Newmont Mining
$21.50
$60.62
182.0%
Dickinson Mines
$6.88
$27.50
299.7%
Sigma Mines
$36.00
$57.00
58.3%
Giant Yellowknife Mines
$11.13
$39.00
250.4%
AVERAGE
 
 
289.5%

You'll see there was great variability among the returns of these companies. That's why, even if you believe we're destined for an "all-boats-rise" scenario, you still want to own the better companies.

Today, Barrick is selling for $47.59 (as of November 25). If our mania started now and mimicked the average 289.5% return, ABX would reach $185.36 at its peak. GDX at $54.79 today would hit $213.40.

Keep in mind, though, that our data measure the exact top of each company's price. Most investors, of course, don't sell at the very peak. If we were to able to grab, say, the middle 80% of the climb, that's a return of 231.6%. Barrick would hit $157.80 and GDX $181.68 in that scenario… still tantalizing returns.

And with all due respect to Barrick management, there are gold stocks we're convinced will far outperform the largest gold company in the world in the coming mania.

Here's a sampling of how junior gold stocks performed in the same period, along with the month each peaked.

Returns of Juniors in 1979-1980 Mania
Company
Price on 12/29/1978
Price Peak
Date of Peak
Return
Carolin Mines
$3.10
$57.00
Oct. 80
1,738.7%
Mosquito Creek Gold
$0.70
$7.50
Oct. 80
971.4%
Northair Mines
$3.00
$10.00
Oct. 80
233.3%
Silver Standard
$0.58
$2.51
Mar. 80
332.8%
Lincoln Resources
$0.78
$20.00
Oct. 80
2,464.1%
Lornex
$15.00
$85.00
Oct. 80
466.7%
Imperial Metals
$0.36
$1.95
Mar. 80
441.7%
Anglo-Bomarc Mines
$1.80
$6.85
Oct. 80
280.6%
Avino Mines
0.33
5.5
Dec. 80
1,566.7%
Copper Lake
$0.08
$10.50
Sep. 80
13,025.0%
David Minerals
$1.15
$21.00
Oct. 80
1,726.1%
Eagle River Mines
$0.19
$6.80
Dec. 80
3,478.9%
Meston Lake Resources
$0.80
$10.50
Oct. 80
1,212.5%
Silverado Mines
$0.26
$10.63
Oct. 80
3,988.5%
Wharf Resources
$0.33
$9.50
Nov. 80
2,778.8%
AVERAGE
 
 
 
2,313.7%

If you bought a reasonably diversified portfolio of top-performing gold juniors prior to 1979, your initial investment could've grown 23 times in just two years. If you managed to grab 80% of that move, your account balance still would've grown 1,850%.

This means a junior priced at $0.50 today that goes on to become a Mania Phase winner could sell for $12 at the top, or $9.75 at 1,850%. If you own ten juniors, imagine just one of them matching Copper Lake's return.

Here's what returns of this magnitude could mean to you. Let's say you have $10,000 to devote to a portfolio of the best-of-the-best gold juniors. If our mania someday matches the classic 1980 blow-off top, your portfolio could be worth $241,370 at its peak… or about $195,000 if you manage to grab the middle 80%.

This all assumes, of course, that you sell to realize the profit. If you don't take the money and run at some point, you may end up with little more than tears to fill an empty beer mug. Consider this: many junior gold stocks, including some in the above list, dried up and blew away after October 1980. Investors who held to the bitter end not only saw all their gains evaporate but lost their entire investments as well. Keep that in mind, because all bull markets eventually come to an end – even golden ones.

Returns from that era have been written about before. So I can hear some investors saying, "Yeah, but that only happened once."

Au contraire. Read on…

The Hemlo Rally of 1981-1983

Many investors don't know that there have been several mini-manias in gold and especially gold stocks outside of the 1979-'80 period.

Ironically, gold was flat during the two years of the “Hemlo rally.” But something else ignited a bull market. Discovery. Here's how it happened…

Up until this time, most exploration was done by teams from the major producers. But because of lagging gold prices and the resulting need to cut overhead, they began to shrink their exploration staffs, unleashing a swarm of experienced geologists armed with the knowledge of high-potential mineral targets they'd explored while working for the majors. Many formed their own companies and subsequently went after these targets.

This led to a series of spectacular discoveries, the first of which occurred in mid-1982, when Golden Sceptre and Goliath Gold discovered the Golden Giant deposit in the Hemlo area of eastern Canada. Gold prices rallied that summer, setting off a mini bull market that lasted until the following May. The public got involved, and as you can see, the results were impressive for such a short period of time.

Returns of Producers Related to Hemlo Rally of 1981-1983
Company
1981 Price
Price Peak
Date of High
Return
Agnico-Eagle
$9.50
$21.00
Aug. 83
121.1%
Sigma
$14.13
$24.50
Jan. 83
73.4%
Campbell Red Lake
$16.63
$41.25
May 83
148.0%
Sullivan
$3.85
$6.00
Mar. 84
55.8%
Teck Corp Class B
$17.00
$21.88
Jun. 81
28.7%
Noranda
$33.75
$36.38
Jun. 81
7.8%
AVERAGE
 
 
 
72.5%

Gold producers, on average, returned over 70% on your money during this period. While this isn't the same spectacular gains from just a few years earlier, keep in mind this occurred in about 12 months' time. This would be akin to a $30 gold stock soaring to $51.75 by this time next year because it's located in a significant discovery area.

Once again, it was the juniors that brought the dazzling returns.

Returns of Juniors Related to Hemlo Rally of 1981-1983
Company
1981 Price
Price Peak
Date of High
Return
Corona Resources
$1.10
$61.00
May 83
5,445.5%
Golden Sceptre
$0.40
$31.00
May 83
7,650.0%
Goliath Gold
$0.45
$32.00
Mar 83
7,011.1%
Bel-Air Resources
$0.81
$1.60
Jan. 83
97.5%
Interlake Development
$2.10
$6.40
Mar. 83
204.8%
AVERAGE
 
 
 
4,081.8%

The average return for these junior gold stocks that had a direct interest in the Hemlo area exceeded a whopping 4,000%. A $0.50 junior stock today would exceed $20.

This is especially impressive when you realize it occurred without the gold stock industry as a whole participating. This tells us that a big discovery can lead to enormous gains, even if the greater industry is flat. In other words, we have historical precedence that humongous returns are possible without a mania, by owning stocks with direct exposure to a discovery area. There are numerous examples of this in the past ten years, as any long-time reader of the International Speculator can attest.

By May 1983 – roughly a year after it started – gold prices started back down again, spelling the end of the bull market. Another reminder that one must sell to realize a profit.

The Roaring '90s

Junior exploration companies were now starting to collect on the "intellectual capital" they'd inherited from the majors. Another series of gold discoveries in the mid-1990s set off one of the most stunning bull markets in the current generation.

Companies with big discoveries included Diamet, Diamond Fields, and Arequipa. This was also the time of the famous Bre-X scandal, a company whose management was later found to have been "salting" drill intercepts.

[One of Doug Casey's biggest wins during this time was Diamond Fields. He started buying the stock around 25 cents and later sold at prices as high as $120. You can do the math. To read more about his other spectacular wins in The 1970s Interview with Doug Casey...]

By the summer of '96, investor interest had sparked a minor mania, and companies with little more than a few drill holes were selling for $20 a share. The table below, which includes some of the better-known names of the day, is worth the proverbial thousand words. And if you're the kind of investor with the courage to buy low and willingness to sell during a frenzy, it can be worth a million dollars.

Returns of Producers in Mid-1990s Bull Market
Company
Pre-Bull Market Price
Price Peak
Date of High
Return
Kinross Gold
$5.00
$14.62
Feb. 96
192.4%
American Barrick
$28.13
$44.25
Feb. 96
57.3%
Placer Dome
$26.50
$41.37
Feb. 96
56.1%
Newmont
$47.26
$82.46
Feb. 96
74.5%
Manhattan
$1.50
$13.00
Nov. 96
766.7%
Cambior
$10.00
$22.35
Jun. 96
123.5%
AVERAGE
 
 
 
211.7%

The average producer more than tripled your money during this period. Once again, these gains occurred in a relatively short period of time, in this instance inside of two years.

Here's how winning juniors performed. Hold on to your hat.

Returns of Juniors in Mid-1990s Bull Market
Company
Pre-Bull Market Price
Price Peak
Date of High
Return
Cartaway
$0.10
$26.14
May 96
26,040.0%
Golden Star
$6.00
$27.50
Oct. 96
358.3%
Samex Mining
$1.00
$7.20
May 96
620.0%
Pacific Amber
$0.21
$9.40
Aug. 96
4,376.2%
Conquistador
$0.50
$9.87
Mar. 96
1,874.0%
Corriente
$1.00
$19.50
Mar. 97
1,850.0%
Valerie Gold
$1.50
$28.90
May 96
1,826.7%
Arequipa
$0.60
$34.75
May 96
5,691.7%
Bema Gold
$2.00
$12.75
Aug. 96
537.5%
Farallon
$0.80
$20.25
May 96
2,431.3%
Arizona Star
$0.50
$15.95
Aug. 96
3,090.0%
Cream Minerals
$0.30
$9.45
May 96
3,050.0%
Francisco Gold
$1.00
$34.50
Mar. 97
3,350.0%
Mansfield
$0.70
$10.50
Aug. 96
1,400.0%
Oliver Gold
$0.40
$6.80
Oct. 96
1,600.0%
AVERAGE
 
 
 
3,873.0%

Many analysts refer to the 1970s bull market as the granddaddy of them all – and to a certain extent it was – but you'll notice that the average return here exceeds what the juniors did in the 1979-'80 market.

This is akin to that $0.50 junior stock today reaching $19.86… or $16 if you snag 80% of the move. A $10,000 portfolio could grow to over $397,000 (or over $319,000 on 80%).

Gold Stocks and the Greater Depression

Those of you in the deflation camp may dismiss all this because you're convinced The Great Deflation is ahead. Fair enough. But you'd be wrong to assume gold stocks can't do well in that environment.

Take a look at the returns of the two largest producers in the US and Canada, respectively, during the Great Depression.

Returns of Producers During the Great Depression
Company
1929 Price
1933 Price
Total Gain
Homestake Mining
$65
$373
474%
Dome Mines
$6
$39.50
558%

During a period of soup lines, crashing stock markets, and a fixed gold price, large gold producers handed investors five and six times their money in four years.

If deflation "wins," we still think gold equity investors can, too.

The Catch

Before you sell your kids to buy gold stocks, be aware of the fine print: history may not repeat. There's no law that says we have to get a mania; it's a good bet, we've no doubt, but it could be different than what we saw before – maybe the mania occurs just in gold and not the stocks… or maybe it's only in certain geographical areas… or it takes longer than what some investors have the patience for.

The point here is simple: don't invest so much that you get wiped out if it doesn't come to pass.

In the end, though, we think the efforts by governments around the world to reflate the economy will work. Throughout history, a fiat currency system has never lasted – not even once. Eventually, they all fade away. And whether or not gold (or silver) are somehow figured into the monetary replacement, the odds are high that we'll see a mania of epic proportions in our industry, as the world's current fiat currencies implode. Truly life-changing gains will be reaped by those with the foresight, courage, and cash to act before it arrives.

So, yes, someday we think your favorite gold stock will sell for $200. Or perhaps a lot more.

[If you've been thinking about joining Doug Casey and Louis James as they speculate on the best of the best precious metals juniors, now is the time to take advantage of a special discount on Casey International Speculator. If you prefer the relative stability of the profitable gold and silver producers, Jeff Clark brings you the best ideas on those every month in BIG GOLD. Now is the time to invest, before the mania kicks in, as prices on gold stocks are as attractive as they’ve ever been.]

© 2011 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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