The stocks-to-commodity ratio has been this low two other times in the past 60 years, in 1974 & 2000. The amount of money you could have made buying this low was tremendous.
Gold, for instance, went from $32 an ounce to over $1000 an ounce. Gold miners did even better due to a rise in margins. When the price of gold went up, their cost generally remained fixed. It wasn’t usual to see junior miners climb 3000% in the last supercycle.
That same situation is happening again. But this time, the price of oil is falling.
The price of gold is up 35% over the past 52 weeks, silver is up 34%, and copper is up 21%, but oil is about 30% off its highs over the same period. Diesel used in equipment has also fallen from $5.20 a gallon two years ago to $2.23 today.
Oil is generally between 20-50% of the all-in sustaining costs (AISC) framework used by gold miners, depending on mine type and location.
The dollar can’t go off the gold standard like it did in 1972, but you could see a run like we had in the early 2000s.
Generational Markets
Markets tend to run in 16-year cycles. That’s how long it takes to bring in a new generation of suckers. Anyone who was in high school in 2009 during the last crash is now in his mid-30s and is entering their prime investment years.
They don’t remember the last crash, but they listen to their buddies who made a lot of money on meme stocks over the past few years and want to make a lot of money themselves – damn the risks.
So they bid up stocks to very high expensive levels where we are now. By many valuation metrics, stocks have never been more expensive. And then it crashes and starts all over again.
For example, if you bought the QQQs in the year 2000 you would not have broken even until 2016. As you can see by the chart above, commodity bull markets tend to be a little bit shorter than that, and they run counter to equities.
We are 16 years into the S&P 500 bull market if you count from the low of 2009. At some point over the next year or so, commodities will start to climb, and the passive index investors will take a hit.
Right now, the market is expecting that the gold mining sector will have a 3.5% compound annual growth rate (CAGR) with a 6.5% earnings growth. However, if gold jumps above $3000 an ounce and with oil prices dropping due to OPEC opening the spigots, we could see earnings growth move into the 20% range.
This would mean a rapid re-rating of gold stocks to a much higher level. Buy gold, buy silver.
All the best,
Christian DeHaemer
Outsider Club
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