Buy the Miners — It’s Like Getting Gold for $1,100: Fund Manager

Okay, friends. Step right up, and set your eyes on the deal of a lifetime. If I could show you folks how to own gold at a third of its true cost -- would you do it?

Pardon my lapse into snake-oil salesman mode, but having just heard two investors in as many days pitch me on the virtues of buying gold mining stocks as the price of gold plunges, well, I must be having a touch of the TGTBT Syndrome (too good to be true).

"The reason to buy a gold mining company is because that discrepancy in value is so wide," says Darren Pollock of Cheviot Value Management, referring to a 30% gap between the gains in gold and the mining companies who produce it.

It's certainly not a new problem for the miners but is one that Pollock thinks is about to change. To be clear, this is not a call for gold to go down. Quite the contrary. It's a call that gold will stay higher and that miners are not being fairly compensated for their exposure to it.

Case in point: Newmont Mining (NEM). It's not only Pollock's largest position but a stock that he says has sat at $60 a share since January at a time when gold rose 25%. And if you go back five years, he says, you'll still see Newmont sitting at $60, but the price of gold was $500 then, less then a third of what it is now.

What's worse, Pollock says, is that Newmont's production and reserves have continually grown while its costs to extract gold from the ground has gone down.

"Newmont Mining's cash costs are about $600 an ounce, so we're looking at huge gross margins right now," he says. "It's pure profit going forward."

While he is still a long-term advocate and owner of gold, Pollock says the short-term drop was expected because "hot money flees as quickly as it comes in."

That said, the case for mining stocks is predicated on the idea that investors are finally accepting that the elevated price of gold is going to be around for a while. The last time this discrepancy/performance lag happened was a few decades ago, but miners have enjoyed a great period of catch-up and price appreciation, according to Pollock.

While the Market Vectors Gold Miners ETF (GDX) is better known, he prefers the tax advantage that comes with the Central Fund of Canada (CEF).