Golden Nuggets Focused on Gold, Resources and Overcoming Negativity

Golden Nuggets Focused on Gold, Resources and Overcoming Negativity

December 28, 2012

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

The past few days I’ve been counting down the most popular commentaries over the past year. China, commodities and bond fund popularity were big hits; so were the Surprises in Gasoline, Oil and Resources Stock Prices. Here are the top four.

4. Sell in May and Go Away? Not this Year
Sometimes it’s the headline that attracts readers, and this is definitely one that gained a great deal of attention. More than 7,000 Seeking Alpha readers checked out the commentary and many left some pretty energized comments—some agreeing with me, and others with a differing view.

I took on the old adage and argued that there were plenty of reasons for investors not to let their equity positions take a long summer vacation. So how did the S&P 500 Index perform? As shown in the chart below, stocks fell significantly in May, but then went on to have a fantastic summer, with June, July, August and September all remaining in positive territory.

One of the reasons I gave for sticking with stocks is the fact that it was the year of an election, which has historically produced positive returns. Since 1972, the stock market has rallied five of the eight election years, according to J.P. Morgan, with market gains of 12 to 26 percent. Only during recession years did the S&P 500 decline.

Not only did the summer of ’12 buck the trend, but take a look at the latest presidential election cycle. The performance of the S&P over the last four years under Obama has been one of the best over the past 50 years of any president, defying the odds of what many people thought about the market.

3. Love Trade Cools As Central Banks’ Gold Demand Heats Up
The third-most popular commentary generated a lot of attention because of the relatively new trend that I’ve highlighted a few times in 2012: Emerging markets’ central banks are diversifying away from the U.S. dollar and buying gold.

This trend could be potentially significant in the coming years. Last October, I highlighted Franco-Nevada’s Pierre Lassonde chart showing the potential increase in gold holdings. Based on the European Central Bank’s recommendation to hold 15 percent of reserves in gold, developing countries would have to accumulate 17,000 tons of gold. At a purchase of 1,000 tons a year (or about 40 percent of today’s production), these central banks would have to buy gold for the next 17 years!

Back in May, I spoke at the Hard Assets Investment Conference in New York. Business Insider posted my slides calling them the “ULTIMATE Bullish Presentation on Gold” and since then the presentation has received 233,141 views on their site, making it our most popular presentation of the year. In case you missed it, you can view all 88 slides.

2. Where’s the Beef for Gold Equities?
Our second-biggest story was also gold related, but this year, gold miners were top of mind for investors as gold stocks have remained undervalued compared to bullion. When I discussed the disconnect back in April I pointed out the spread between the NYSE Arca Gold Miners Index and gold bullion was at the same extreme level it was during the 2008 credit crisis despite an improving global economic outlook.

Last week Bloomberg’s “Chart of the Day” displayed the same ratio of gold miners vs. gold, going back to September 1993 when the industry gauge was created. As you can see in the chart below, yesterday’s ratio of 0.75 hasn’t moved much from the year’s low of 0.70 on May 15. We see this as a buying opportunity for quality companies as shares of gold miners are a relative bargain to the metal.

One of our most popular publications of the year was the Special Gold Report: What’s Driving Gold Companies? I looked at the multiple forces squeezing the profits and earnings out of gold miners and highlighted the importance of selectively choosing companies that exhibit the best relative growth and momentum characteristics.

1. How to Look Past Negativity to See Opportunity
“Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.” These wise words from Plato reflect the theme of our readers’ favorite posting of 2012. Things are not always as they appear, especially in the media. At a natural resources conference I attended last summer, GMO’s Jerry Grantham made a compelling case for investment in resources but the CNN article on his speech was titled “Our planet will truly be toast.” When I was interviewed on CNBC a host who had hyped the initial public offerings of Facebook and Groupon to viewers scoffed at investing in gold. Since their IPOs, those two high tech companies had collectively lost more in value than all the money invested in gold funds.

Many investors have been unable to recapture their lost confidence. Americans have missed out on almost $200 billion of stock gains as they pulled money from the markets in the past four years since the financial crisis, according to a story last week by Bloomberg. I believe this post proved popular because we could all use some good news and positive solutions. I reminded investors to look past the negativity to see the patterns and anomalies that will determine where opportunities and threats lie.

Though our political leaders are not instilling much confidence in their dealings with the fiscal cliff and recent tragic events have broken our hearts and weigh on our minds as we wrap up the year, I believe that 2013 will bring renewed hope, optimism and opportunity.