What will happen to gold stocks when they enter the mania stage? (CSCO, INTC, ABX)

• The gold stock scarcity premium
• Would you buy a stock with a pe ratio of over 200?
• A note on silver

We're not yet in the mania stage for gold. We could be as close as a year, or as far as 5 years, but we're just not there yet. Take a look at the chart below, which shows gold compared to two of the last, biggest asset bubbles.

What kind of performance can we realistically expect for gold companies to see when we do enter the mania phase?

It's tough to find historical data on gold companies during the 1970s. Most of them are gone. The rest have been gobbled up or sliced apart into completely different companies.

We do have a frame of reference for the internet bubble. You might remember that time as a period when everyone had a hot stock tip. Everyone was up hundreds of percent, or more, on companies like Cisco and Intel.

Shares of these companies entered the stratosphere of price-to-earnings as everyone HAD to own them. This excitement and mania put what I call a “scarcity premium” on shares – sending Cisco shares to sell for more than 188 times earnings at the height of the dot-com bubble.

And remember, Cisco was one of the major companies in the Nasdaq back then. There were plenty of companies with no earnings, or negligible earnings. Some of them were decent businesses with some promise, but many were glorified boiler rooms with a 4 digit ticker symbol.

So while a Nasdaq blue chip like Cisco traded at 188 times earnings, the average pe ratio for the whole Nasdaq exchange was off the charts – at over 250 shortly before the bubble burst…

That's the power of a mania stage.

Obviously, buying a company that sells for more than 100 times earnings is suicidal. But today, you can still pick up shares of some really great gold companies for less than 25 times earnings. The biggest and most boring of these companies, Barrick gold ABX sells for less than 15 times earnings. I'm not a big fan of Barrick because it has somewhat limited growth potential even compared to most other gold majors and nearly all gold mid-tier producers. But when the mania stage takes a hold of Barrick gold, you'll have every cab driver and hairdresser you meet telling you how they've allocated 33% of their portfolio into safe majors like Barrick. I don't know if Barrick will sell for more than 188 times earnings, as Cisco did in 2000, but it gives you a frame of reference for where we are in for before the end of this bull market for gold and gold companies.

A note on silver…

I know that you probably don't want to hear it right now, but this correction, ahem, huge correction in silver is par for the course. Silver might be the most volatile commodity in the world. My long term thesis for silver has not changed one iota. I still believe strongly that we'll see $100+ silver in the coming years. If you believe as I do, I strongly encourage you to buy more physical silver on these dips, and to look for promising silver companies.

My colleague Tyler Laundon recently did some excellent work on finding silver companies with extremely low cash costs per ounce. He's found two companies that can get silver out of the ground for less than $6 an ounce. These companies are getting pulled down, along with silver – but the fact is, they'll still be extremely profitable at $35 silver – or even $15 silver. He's been excited about these companies for a while now, but with this correction, you can now get into these $6 silver producers for a substantial discount. You can read more about these silver companies by clicking here now.

I want to emphasize, if you were bullish on silver when it was making new highs every day just a couple weeks ago, you should be dramatically more bullish today – when it's much more affordable.

The long-term trend hasn't changed.

Good investing,

Kevin McElroy

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