Gold Stock Traders Should Lick Their Lips


"Rick Rule, says 'volatility in sector will be absolutely spectacular.'"

Traders in small gold stocks should be licking their lips with anticipation at the prospects for the next five years. But, those with a view to capitalizing on the gold price alone should stick to the metal itself.

Speaking on Mineweb's Gold Weekly Podcast, Global Resource Investments Founder, Rick Rule, says "the volatility we are going to experience in the sector is going to be absolutely spectacular," and as a result trading opportunities are going to abound.

This, he says, will be particularly evident if we have another credit contraction. "The mining business is notoriously capital intensive, and, if there is no capital, these people don't have any business.

"The collapse in equities prices that I think we will see occur on a periodic basis is a function of the market's reaction to occasional credit contraction and will provide spectacular opportunities to those who have the courage to be brave when others are afraid followed by the sense to be afraid and sell when other people become brave again."

He does not, however, favor the big gold producers, saying that, historically, the gold mining business has been very poorly run.

"I am receiving a lot of research today that says, xyz company is undervalued because it is selling at 1.6x NAV in an environment where everything else is selling at 2x NAV. The idea that a company in an extractive industry—that is a company that is in liquidation because that is what mining companies are—should sell at 2x NAV, is very difficult for me to get my head around."

Especially because, he says, the explanations for such thinking don't seem to hold water. The first of these is that there is an implicit gold price warrant in a gold equity that would see gold mining margins increase as the price of the metal rises.

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