Rick Rule, proprietor at Rule Investment Media, shared his latest thoughts on the mining sector, honing in on gold stocks, as well as the opportunity he sees in the silver, platinum, palladium and nickel markets.
Looking first at gold stocks, he said he’s never seen them more disconnected from the gold price in his career.
‘I have also not seen as much investor hostility to the gold stocks since 1970. Nor have I seen gold stocks at these valuation levels relative to book or relative to free cashflow,’ the veteran resource investor and speculator added. ‘So the industry suggestion that the market for gold stocks is at record lows is accurate.’
In Rule’s opinion, gold-focused companies deserve this type of sentiment given their previous performance.
‘The gold industry needs to own the fact that in the decade 2000 to 2010, when the gold price went up sevenfold, free cashflow per share on the Philadelphia Gold and Silver Index (INDEXNASDAQ:XAU) fell. It took real talent to generate declining free cashflow in the face of a sevenfold in the (gold) price,’ he explained. ‘And the juniors actually are worse.’
For that reason, Rule is interested in specific gold stocks, but not the gold equities as a whole.
‘What investors need to understand is that although I think if you buy the sector you go broke, if you buy good individual companies you get rich. There are a few performers both among the majors and among the juniors that deliver so much value and so much performance that they add legitimacy to the full sector,’ he said.
Interestingly, he sees young investors taking that approach — they are attracted to the gold thesis and are willing to search for winning companies. The same can’t necessarily be said for long-term gold bugs. According to Rule, many are holding gold stocks that are unlikely to move until the gold price moves. As a result, they’re growing frustrated.
The silver lining is that to him this situation looks like the start of a gold stock bull market. ‘The intelligent application of capital in a bad market is always square one for building a bull market. I feel over a five year timeframe very attracted not to the gold-mining sector, which I think is a disaster … but to some of the high-quality companies,’ he said.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.