In 2014, the tone at the Prospectors & Developers of Canada (PDAC) Convention was decidedly chillier inside the hall than it was outside.
I couldn’t get one gold or silver company executive to look me in the eye. Some didn’t even come to the conference!
But today, the atmosphere inside the convention hall is warm and jovial. There’s a heavy layer of snow on the ground, but hundreds of precious metals and industrial metals companies are out in full force.
That’s because gold has started to emerge from a six-year slump. And the reasons to own gold and mining shares are piling up like mountains of bullion.
Bullish Indicator No. 1: Lean, Mean Miners
Last year, share prices for metals companies were hitting multi-year lows.
The price of gold, silver, and other metals had crashed hard in 2013, and many much-lauded acquisitions had gone bust as a result. The biggest was a $14-billion write-down by Rio Tinto (NYSE:RIO), much of which was related to the $38-billion acquisition of Alcan, the aluminum giant.
Barrick Gold Corporation (NYSE:ABX), too, has written off close to $9 billion for entities it owns.
In fact, miners have written off more than $50 billion in projects in the past two years after some overly optimistic asset-buying sprees over the past decade, totaling close to $200 billion.
But things are different this year.
Instead of buying up any ol’ hole in the ground when gold prices were hovering around $2,000 per ounce, miners are making deals at more-rational levels.
Last year, Goldcorp Inc (NYSE:GG) announced plans to buy Osisko, a miner with potentially more than 10 million ounces of gold in the ground. It offered $2.6 billion, only to be outbid by a joint partnership of Agnico Eagle Mines Limited (NYSE:AEM) and Yamana Gold Inc (NYSE:AUY).
This is notable because, a decade ago, Goldcorp would likely have counter-offered instead of walking away. Instead, Goldcorp moved on and bought a smaller miner, Probe, for just over $400 million.
Similar smaller deals have taken place across the market. And at the PDAC, there’s talk that two giants, Barrick and Newmont Mining Corporation (NYSE:NEM), may restart merger talks.
The point that I’m trying to make is that miners have learned a very hard and expensive lesson about overpaying for assets in a frenzied bull market. These days it’s about the costs and overhead.
The miners you can buy today are leaner and more equipped to make profits with prices where they are. Plus, a move higher will result in stronger profit numbers, as they’ve dumped many of the cash holes that were dragging down their finances.
And when it comes to the metal itself, there are a few more reasons to invest.
Three More Bullish Signs for Gold
The second reason is that from a technical point of view, gold has made a triple bottom. It’s bounced off the $1,150 to $1,200 level nicely. It’s even jumped to $1,300 recently before pulling back.
Now, gold is up against a surging greenback, which has an inverse correlation to gold prices, as the metal is priced in dollars. When you look at other currencies, like the euro and yen, gold prices are surging.
Which bring me to the next factor to consider: Currency wars and devaluations are prime reasons to own gold, since it’s seen as a historical store of value. (Speaking of currencies, Founder Robert Williams recently discovered a new currency that could take on Bitcoin.)
Third, central banks all over the world are lowering interest rates, with China being the latest.
Low rates or even negative rates (as we’ve seen from Switzerland and Denmark), are terrible for those seeking income. But it weakens the argument against holding gold, as one of the major benefits of holding cash is the interest rate.
Fourth, lower interest rates in emerging markets will foster economic growth.
India is a major gold buyer, and its gross domestic product is expected to grow in excess of 7% this year. That puts it ahead of China, which is also beginning to stimulate its economy. That’s means a lot of rupees and yuan will be chasing gold in the coming months.
Bottom line: If you don’t own gold, you should consider adding some to your portfolio.
The stage is set for a rally in the sector after more than six years of pain. And if the mood at PDAC is any guide, the market is shining with a new luster.
And the chase continues,
BY Karim Rahemtulla