It's time to buy gold, miners: prices in store for 'superior' trading next 3 years - Sprott
(Kitco News) Gold has done its job during the COVID-19 crisis and will continue to do its job going forward, including posting "superior" performance for the next three years, according to Sprott Asset Management.
“Gold and precious metals mining shares are casualties of panic selling across all financial markets,” wrote the firm’s senior portfolio manager John Hathaway.
The March sell-off in precious metal is looking very similar to what happened during the 2008 financial crisis, which eventually led to gold’s massive rally. This trending pattern is likely to repeat itself once more in 2020, Hathaway pointed out.
“When the general selling exhausted itself in late 2008, gold and mining shares delivered superior absolute and relative performance for the following three years. We believe that this pattern is likely to repeat following this sell-off,” he said in a report published on Wednesday.
The biggest story out of the COVID-19 panic has been the deflation of financial assets, with stocks still down on Monday even after an avalanche of monetary policy responses from across the globe.
“Markets that had been priced for perfection must now reckon with a likely recession, soaring fiscal deficits and the very real possibility of a sustained bear market,” wrote Hathaway.
Even after the COVID-19 chaos is over, Sprott does not see financial asset valuations returning to pre-crash manic levels. “Valuations are driven by investor psychology, leverage and the liquidity necessary to support leverage. All three may have been critically impaired for the near to intermediate term,” Hathaway pointed out.
Although gold is getting caught up in the selling, it is still managing to deliver positive performance year-to-date.
“Gold bullion is up 0.73% as of March 17, compared to -25.17% for the S&P 500 Index … The 12-month figures (as of 3/17/2020) are even more impressive: gold has returned 17.19% vs. -8.54% for the S&P 500,” said Hathaway.
History lesson: gold is going up
Going forward, even better things are in store for gold and the gold miners, which is why now might be the perfect time to buy, according to Hathaway.
“During the 1930s credit deflation, gold and gold mining stocks performed well in relative and absolute terms. When credit deflates, and counterparties cannot be trusted, gold is the ultimate safe asset. In the 1930s, the metal price rose, costs of producing gold declined and the miners generated strong earnings and paid handsome dividends. We believe that this is a sequence that will repeat,” he explained.
Miners will be the exception this year, being “one of the few industries” that will report strong annual gains in 2020 and possibly in 2021, Hathaway added.
Right now, mining companies are “extraordinarily cheap,” and even though “buying low is never easy … now is the time to do it,” the report stated.
Gold is also offering a good opportunity to buy at the moment as more competitive investors will be joining the space while interest in the metal grows. “If financial assets struggle, interest in gold is very likely to widen,” Hathaway wrote.