Did Mark Cuban and the Dow just prove gold bugs right?

February 16, 2016 03:10 PM

When celebrity investor Mark Cuban announces to the world that he is investing in gold, is that a sign that the ride up is just getting going, or that it has already peaked?

The Gold Report reached out to long-time experts in the sector for a better understanding of what is moving the markets—negative interest rates, a topping dollar, Fed testimony, increased gold buying in China—and what that means for junior mining stocks in the coming months.  

A lot of investors were turning back to gold in mid-February as an alternative to a larger stock market that didn't seem to make sense anymore. The Dow Jones Industrial Average dropped 1.6% in one day, falling below its August low and spooking the chart-watchers. "I think people are so confused about this market. Nobody really understands what's happening, including me," billionaire businessman Mark Cuban told CNBC's "Fast Money: Halftime Report" on Feb. 11. "When traders don't know what to do, they go where everybody is. And I thought that would be gold." He then shared his recent purchase of gold call options, not as a hedge, but in anticipation of momentum pushing the price of the metal higher.

The day before, Frank Holmes, CEO and chief investment officer at U.S. Global Investors Inc., predicted in his blog that gold was shaking off its downward trend after three years of losses and that these highs will be "stickier" than previous rallies. His optimism was based on the gold price breaking through above the 200-day moving average.

Holmes pointed to increased demand for gold from China, where physical delivery reached a record 2,596 tonnes, and increased gold coin sales in Europe, the U.S. and Australia. He also noted that a trend toward negative interest rates in Sweden and Japan also makes gold more attractive. 

 

We asked some of our most popular experts to comment on the fundamentals Holmes quoted.

Joe Foster, lead investment team member with the Van Eck International Investors Gold Fund, also credited increased Asian demand for pushing precious metal prices up, and pointed out that what is good for gold could be even better for gold equities. In a note to investors, Foster said, "It makes sense that equities should outperform gold during rising gold prices, and underperform if gold falls.

We now see the industry in the best shape it has been in for a long time. Unfortunately, this positive transformation of the sector coincided with, and to some extent was intensified by, a period of falling gold prices. Equities have consistently demonstrated their effectiveness as leverage plays on rising gold during these past years."

Many saw the declining stock market trends as bullish for precious metals and commodities. Jeb Handwerger, in a Feb. 8 article titled, "Did Precious Metals and Junior Gold Miners Just Bottom?", said, "Now we could be in the early stages of a massive bull market in junior equities off of a historic low breaking above the 200-day moving average. Meanwhile, the U.S. dollar has failed to break through early 2015 highs and is heading lower, breaking below the 200-day moving average."

Handwerger speculated on the impact for the mining stocks. "Huge amounts of institutional capital may be flowing into the major gold miners such as Barrick Gold Corp, Newmont, Kinross Gold Corp. and Agnico Eagle Mines Ltd., which have all seen big moves off of December lows. There is an increasing probability that we saw the bottom at the end of 2015.

Major investments have taken place recently in the junior sector specifically in uranium, gold and lithium. Fission Uranium Corp., Gold Standard Ventures Corp., Orocobre Ltd.  and Oban Mining Corp. have all recently raised large amounts of capital. This could be just the beginning, as other high-quality situations may find the critical cash needed to advance mineral projects."

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