The Gold & Silver Mining Stocks: An Investment Whose Time Has ...

Over the last several years, gold and silver mining stocks have underperformed their underlying metals by a fairly wide margin, much to the chagrin of those who have used the mining stocks as their primary precious metals exposure.? However, all things are cyclical and there is very strong evidence to believe that this underperformance could be about to reverse strongly.

When looking at the ratio between gold and the XAU (gold & silver mining company index) over the past 28 years, one will find that the average ratio between the two had been about 4.? So, where is it today???? As I write this, it is currently over 10!? Let me try and translate how egregious the current ratio of 10 is as best I can:? If the XAU was currently trading at its average ratio to gold of 4, the price of the index would now be 150% higher than where it currently is!? Said another way, instead of trading at $164, the XAU should be priced at $410. ?Let?s look at another example:? It would be like the S&P 500 currently trading with a PE of about 5.75 instead of the current 14.5 level.? In terms of price, the S&P 500 would be currently at $552 instead of its current value of $1,400 with the same level of earnings that it has today.?? I hope that this helps you understand how terribly cheap the gold/silver mining stocks truly are.

This is occurring at the same time that gold has not even broken its downtrend from 2008 and sentiment in the precious metals arena is at multi-year lows (actually an extremely bullish contrary indicator).? There are a number of reasons that the gold/silver mining stocks are as cheap as they are some of them have a little validity, but I believe that the primary culprit to what has caused the dislocation to be so large is, in my opinion, based upon hedge funds going long gold while shorting the gold/silver mining stocks.? From some sources that I have discussed this with, there appears to have been quite a large implementation of this trade across the industry in the past few years, which obviously benefits gold, while putting pressure on the mining stocks.? With the ratio of gold/XAU hitting such extremes in recent days and the fact that gold appears to have bottomed, there is a strong argument that the hedge fund trade could be unwound fairly aggressively and that would mean big upside for gold/silver mining shares.

Every major dislocation in the market represents opportunity and this one appears to be no different.? ?Nobody can time the markets, nor can anyone exactly know why such market dislocations occur, but it sure looks as though the gold/silver mining stocks could be poised for quite a snap-back rally in the months ahead.? Of course, as with all investing, the risks are certainly high there are never any guarantees, but investing is about being able to quantify risk properly and the risk in the miners appears to be quite a lot more upside from here than downside.

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Steven M. Ayer, CIMA?, AIF?
Managing Director
Strata Wealth Management
HighTower Advisors
440 Mamaroneck Ave, Suite 404
Harrison NY 10528
(o) 914.825.8634 | 914.825.8630
(c) 914.924.4784
(f) 914.777.1751
sayer@hightoweradvisors.com
Author of ?Choosing Simplicity? & Radio Show Host of ?Global Currency Watch?

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The Strata Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. ?Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.?

The Strata Group has obtained all data and other information referenced herein from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The Strata Group and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

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This document was created for informational purposes only; the opinions expressed are solely those of The Strata Group, and do not represent those of HighTower Advisors, LLC, or any of its affiliates.

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