This Last Cheap Sector Could Generate up to 67% in Returns

This overlooked industry is about to break out.

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Central bankers are flooding the world with phony paper money and cheap debt.

Everywhere you look — equities, bonds, real estate — bubbles are brewing. Few assets are reasonably priced, let alone cheap.

However, one of the last bargain sectors is finally moving higher, and triple-digit returns could be on the way. No, this won’t play out overnight. Before the run is over, though, we could see prices double … or more.

Let me explain …

The gold mining industry has been abandoned by the investment community. Thanks to plunging metal prices, the sector was forced to collectively write off millions of ounces in gold reserves. Shareholders watched as billions of dollars in wealth evaporated.

To be honest, things weren’t going well before precious metal prices plunged. With the cost of new projects soaring, miners were barely profitable. Few stocks could keep up with rising gold prices.

This has left gold mining stocks absurdly cheap. The NYSE Arca Gold Bug Index is now trading at its lowest valuation relative to the yellow metal since October 2000. Based on long-term averages, this means the entire sector is undervalued by 40%.

Historically, big gains have followed the last few times gold stocks were this cheap. The last time this happened, the sector went on to rally 600%, although this had plenty of help from higher gold prices. However, even without a rally in underlying commodity prices, miners still have 67% upside potential if valuations return to their historical average.

There are plenty of catalysts that could help miners close that valuation gap. Corporate boards are tiring of freewheeling executives playing fast and loose with shareholder capital. Companies — including majors like Newmont Mining (NYSE: NEM)AngloGold Ashanti (NYSE: AU), and Kinross Gold (TSX: K)(NYSE: KGC) — have replaced their top executives with more conservative, cost-conscious types.

Miners are also running leaner than ever by closing non-productive mines, slashing labour costs, and putting expensive projects on hold. Unless gold prices take another leg down, most of the tough measures like dividend cuts and equity issues are behind these firms.

However, I have one word of warning: Wall Street is beginning to catch on to this opportunity.

Over the past couple of quarters we have seen a number of well-known hedge fund managers dial back their gold purchases in favour of mining stocks. Last week, Credit Suisse issued a bullish report on the entire sector, raising their price targets on almost every mining stock they cover.

As my colleague Matt Smith has pointed out, SEC filings revealed that billionaire money manager Geroge Soros has cut his stake in the SPDR Gold Trust ETF (NYSEMKT: GLD). Instead, the legendary hedge fund manager has been building positions in a number of metal companies, including Yamana Gold (TSX: YRI)(NYSE: AUY)Agnico Eagle Mines (TSX: AEM)(NYSE: AEM), and Franco-Nevada (TSX: FNV)(NYSE: FNV).

Why are all of these Wall Street players building positions in this industry? It could only mean one thing: They see a big rally ahead.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robert Baillieul has no position in any stocks mentioned.

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