James Turk continues:

“There are a few reasons for doing this.  First, and probably most importantly, this chart shows the relative performance of gold measured against the mining shares in the XAU Index.  Since the collapse of Bre-X back in 1997, the trend has been down.  It means that for 16 years gold bullion has been outperforming the gold mining shares, and of late is doing it dramatically.

Of course some individual shares have done better than bullion, but these instances are based on circumstances unique to the company, such as new discoveries or other factors.  But this chart shows that the bulk of the gold mining shares have been underperforming, which is another reason I use the XAU Index.  The XAU Index comprises the share price of 30 mining companies....

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“In contrast, the HUI, which is the other popular gold mining index, is based only on the share price of 18 mining companies, and 17 of those are also included in the XAU.  Therefore, from a statistical point of view, the larger sampling of shares in the XAU provides a better indication of overall mining share performance relative to gold.

It is important to look at these additional 13 mining companies in the XAU.  It includes a couple of large-cap mining shares and, importantly, the companies that earn mining royalties, which are additional reasons to use the XAU.  Lastly, I use the XAU Index rather than the HUI simply because there is more data.  The HUI wasn’t even constructed until the mid-1990s.

I've seen a number of bear markets in the mining shares over the years, Eric, but this one is by far the worst.  In other words, the mining shares have never been this cheap.  There is an old Wall Street adage that bear markets last longer and prices fall further than you expect.  That surely has happened here.   But one also has to ask, why the carnage?

I think there are several reasons, beginning with Bre-X.  After gold samples it produced were found to be a fraud, a lot of investors became leery of the mining stocks, particularly those not producing but hoping to develop an economic ore body.

Then, a few years later, many mining companies shot themselves in the foot by hedging revenue and leaving their expenses unhedged.  It proved to be a disaster because rising input costs from inflation squeezed margins.  Some companies, like Sons of Gwalia went bankrupt and others like Ashanti needed to be bailed out.  So that also contributed to negative sentiment, deepening the bear market.  This situation was made worse by the launch of the gold ETFs.

The ETFs provided an alternative to traditional investors in the mining shares.  They could get exposure to a rising gold price without having to worry about whether the mining company executives would make a mistake, like many did when they hedged their revenue.

These factors explain the reasons for the bear market, and now we have sentiment exceptionally low.  The bottom line is these are the cheapest prices of mining shares I have ever seen in my entire career.  It is easier to explain why a bear market happened instead of providing reasons why a bull market might begin. 

But one reason clearly sticks out.  The historic undervaluation of the mining shares.  It doesn't mean they can't become more undervalued, with prices falling further.  But many of them also look attractive because of the handsome dividends some of the producers are paying these days as a result of improving margins.”

When asked how investors should respond to these events, Turk responded, “First, we have to recognize that buying a mining share is different from buying gold bullion itself.  Mining shares are an investment.  Gold is money, so in contrast to the shares, gold does not have a balance sheet, management team, P/E ratio, or any of the other things that one needs to consider when making an investment. 

But if you are prepared to take the risks of making an investment in the mining shares, they are indeed undervalued, and one rarely goes wrong when buying undervalued assets.  Lastly, I remain bullish on both gold and silver, even though they remain stuck within the trading ranges that confined them for two years now.

Central bank policies around the world are debasing the currencies and making precious metals a safe haven.  This is the key factor which has driven gold higher for 12 years in a row.  Given that the interrelated bank solvency and sovereign debt crises are still with us, though somewhat subdued at the moment, I believe safe haven buying will drive the precious metals to new all-time highs this year.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The interviews with Gerald Celente, Dr. Stephen Leeb, Jim Sinclair, Rick Rule, Ben Davies, Andrew Maguire and Marc Faber are available now.  Also, be sure to listen to the other recent KWN interviews which included James Turk, Bill Fleckenstein, Egon von Greyerz, Felix Zulauf, Eric Sprott and Art Cashin by CLICKING HERE.

Eric King

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rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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