LISI NIESNER/Reuters
The TSX global gold index has lost about a third of its value over the past two years. The S&P/TSX Venture Exchange, stock full of gold mining juniors, hit a multi-year low this month.
Yet, executives and officers who work within those businesses are showing remarkable confidence that the sector is poised for better times.
According to INK Research, there are now seven precious metals stocks on the TSX with insider buying for every one with selling. That's a near doubling of the ratio since mid-January – and represents a level of lopsided transactions that is usually only seen during major market peaks or valleys.
"That is the type of insider buying we saw in the broad market during the height of the great financial crisis in late 2008 and early 2009," points out Ted Dixon, CEO of INK Research. "A similar situation now seems to be in place among gold and silver miners."
Insiders are typically contrarian investors – buying shares when they perceive them to be undervalued. Right now, it appears many think the stocks are going for fire-sale prices.
They are usually early, too. Historically, insider transactions often foreshadow market moves six- to 36-months in advance.
While that may be quite a wait, it's interesting to see insiders display this level of confidence in a sector that the broader investment community has been fleeing.
Mr. Dixon points out that while gold is well off highs near $1,900 (U.S.) an ounce in 2011, the macro backdrop hasn't radically changed. Central banks are working hard to keep real interest rates in negative territory, and the threat that bond-buying measures will eventually lead to inflation – gold's best friend – remains intact.
There are no shortages of forecasts calling for gold's demise, or at least losing some of its lustre. Last week, for instance, Société Générale predicted gold would pull back to below $1,400 (U.S.) an ounce by the end of this year as the U.S. economy improves and the need for quantitative easing is scaled back.
But there are plenty of others that are more optimistic. John Hathaway, manager of the $1.8-billion Tocqueville Gold Fund, who has one of the best long-term track records in the sector, thinks gold could easily vault 25 per cent from current levels to $2,000 an ounce. The recent events in Cyprus have highlighted the continued risks to the global economy arising from the European debt crisis, and gold could continue to benefit from haven flows into hard assets.
While gold stocks have significantly underperformed the bullion market recently for various reasons, including rising production costs, Mr. Dixon thinks miners have a lot of emerging factors working in their favour.
Several CEOs have recently been fired for investing in projects that ultimately hurt shareholder value, suggesting they'll be more prudent going forward. And technicals suggest gold stocks are cheap in relation to gold; last week, the NYSE Arch Gold Bugs index, made up of U.S.-listed gold companies, hit the lowest levels versus the SPDR Gold ETF – an investment in physical metal – since the Lehman Brothers collapse.
"Such extreme situations usually do not last for long," notes Mr. Dixon. "With both fundamental and technical conditions supporting recent heavy insider buying, it looks like a significant bottom in precious metals mining shares may be in the process of forming now."
Darcy Keith