Writing in The New York Times in October 2008 at the beginning of the Great Recession, Warren Buffett wrote, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”
Although Buffett, considered by many to be the greatest investor in history, was writing about stocks at that time in Buy American. I Am., he could just as easily be writing about gold (NYSE: GLD) and silver (NYSE: SLV) in today’s market.
Why Investors Are Fearful of Gold and Silver
The precious metals market has been beaten down. The most recent bearish news was of Barrick Gold (NYSE: ABX), the second largest gold and silver company in the world, announcing it was selling stock to raise capital. That immediately reduced the value of the existing shares (basic supply and demand: the more of something the less it is worth).
That event reduced the value of many of companies in the sector.
As Jim Jubak wrote about this for his column on MSN Money, Barrick Gold (NYSE: ABX), freaked out the gold sector on November 1 with news that it would raise at least $3 billion in a new stock offering. At a minimum of 163.5 million shares, the offering represents 16% dilution for current shareholders. (Earnings would have to be spread over 16% more shares.) And that has raised fears across the sector as traders and investors try to figure out which company might be next. Of course, as is usual, the initial reaction is to sell first and figure out the danger to any specific company later. Shares of Barrick Gold fell 11.2% on November 1.
Editor’s Note: The above paragraph may contain a partial quotation and an effort will be made to make clear which part is the quotation.
Long-Term Gold and Silver Opportunities
For long-term investors that creates an opportunity in the gold and silver sector.
Many individual stocks look solid. In his column, Turbulent Times for Gold Sector, Jubak points to Yamana Gold (NYSE: AUY), another Canadian gold company like Barrick, in writing that, “And these certainly aren’t great times in the gold sector. If, however, I could get a chance to buy Yamana Gold at $9 or less because of troubles at its sector peers, I think the risk would be more than repaid by the potential reward.”
The same is also true for Wishbone Gold PLC (PINK: WISHY), which just released very positive results from its exploration activities in Australia.
From that, it was reported that the “6,300 hectare Wishbone II tenement in Queensland, Australia, . . . has identified new gold and polymetallic mineralization within the license area.” About this bullish news, Richard Poulden, the executive chairman of Wishbone Gold, stated in a recent interview that his outlook for gold was based on, “Standard Chartered [having] a long-term target of $5,000 an oz. My medium-term target is $2,500 based largely on inflation. It is not possible to inject the vast amounts of liquidity into the financial system which has been done by QE and not get inflation. There is the further issue of the massive purchases by China creating a demand squeeze on the metal. Casey Research reckons that the best way to profit from this is to buy the shares of small-cap miners.”
Editor’s Note: The above paragraph contains edited quotations for clarity and accuracy.
Overseas Will Add to the Gold Growth
A significant factor for that positive outlook, according to Poulden, is that, “India and China are the largest gold buyers worldwide. There has been a recent move away from derivative gold products (such as exchange-traded funds) and a move into directly holding the metal. Industrial demand only accounts for about 3% of world purchases so the major buyers of gold are doing so for investment.” That, along with that the largest purchaser “of gold in the world (China) . . . [is] the Chinese government. The Federal Reserve on the other hand is merely printing money (quantitative easing) which will inevitably lead to inflation.”
SPDR Gold Trust (NYSE: GLD), the exchange-traded fund for gold, is down more than 20% for 2013. As Barrick has shown, the major firms are in trouble. But with its recent positive report, small-cap companies like Wishbone Gold PLC do have significant upside. As Jim Jubak noted in his column, “the risk would be more than repaid by the potential reward.”
Editor’s Note: The above paragraphs contain edited quotations for clarity and accuracy.
What are your thoughts about entering in gold and silver given the lows we’ve seen lately?