At the recent gold mining conferences in Colorado, attendees were all smiles. Meanwhile, many investors are selling out and gold funds are having big redemptions.
Amidst extreme negative sentiment, Swiss Gold Letter is of the view that we are approaching a major turning point in junior mining equities and there are huge opportunities abound.
Friday, October 6, 2023
Warren Buffett’s advice is well known,“ be fearful, when others are greedy, and be
greedy when others are fearful”. This is easier said than done!
Most investors are selling! Gold funds are having big redemptions! Financings that would be fully subscribed a year ago are struggling to find support. And sentiment is about as ugly as it can get.
The market is simply focused on higher interest rates and the strong dollar. Those who can buy now when “blood is in the streets” - even their own - as Nathan Mayer Rothschild recommended, should do very well. Huge opportunities abound - even in senior equities like Coeur Mining, an interesting production growth play.
Smiling, Sunny Colorado!
It is always a privilege to attend the two best gold mining conferences in the world: the Precious Metals Summit, in Beaver Creek, Colorado and the Gold Forum Americas in Colorado Springs.
There was a record attendance. Plenty of familiar, smiling faces running from one-to-one meetings. Also, an usually large crowd of corporates were kicking the tires in search of the perfect orphan property!
You could hear: Yukon is on fire! Yes, many great discoveries like Banyan Gold!
But then how come mining stocks are relentlessly going down?
Why is the Gold Miners Bullish Percent Index ($BPGDM) printing at 10.71, a low only seen on two other occasions in the last five years (April 2020 and October 2022)?
Why is the VanEck Gold Miners ETF, the GDX down 43% since it’s August 2020 high?
And down 28.3% since early May! (This is also the lowest level since - April 2020 and October 2022!)
And why are so many Junior precious metal equities collapsing?
Investors Might Be Smiling, But They Are Selling!
If prices are dropping this means, obviously, there are more sellers than buyers.
Valuations being at all time lows relative to the gold price, why are aren't professional investors and the good stock pickers stepping in?
Some very rare contrarians will even venture to say that they are feeling like “a kid in a candy store”!
Well, I will tell you about a little secret.
Redemptions!
Yes, few funds will readily admit it, but there are redemptions in most precious metals equity funds.
Even some funds have had to close or fence their fund forbidding investors to make redemptions. Physical gold ETFs in the western world have seen their holdings diminish.
Its the Interest Rates!
The end of summer is normally known for putting in a bottom for gold and gold shares.
The seasonality is positive ahead of many holidays when the precious metal is purchased.
After the fact, explanations are always pretty simple.
Interest rates have been relentlessly going up at an unusually high speed. Real interest rates moving higher does not obviously help the yellow metal.
As a corollary, the dollar has been very strong up 7% against the euro in less than
three months.
Computers today like to put pressure on gold when the dollar is strong.
This too shall pass!
Time to be a Contrarian . . . AGAIN!
It is, of course, impossible to know exactly when and at what price a bottom will occur.
But it is also quite clear that interest rates and the dollars are massively overbought.
The Gold Miners Bullish Percent Index has only been this negative two times in the last five years (April 2020 - COVID -19 selloff and October 2022). Both occasions led to sustained rallies in the mining stocks.
Fund redemptions are also a sign that we could be near a bottom.
For investors, it feels like gold is trading at $1600, but the price of gold is still above $1800 - which is a profitable environment for well managed companies.
Although it feels like GDX has been making new lows, at 26.32, it is more than twice above the 2015 low of 12.40, and even around 25% above the September 2020 low of 21.5.
In terms of long-term fundamentals for gold, not much has changed.
Bullish Fundamentals for Gold. Stagflation is Possible!
Gold stocks may be down, but do you know what is not down? Government and private debts!
Budget deficits in most countries are out of control. Economies in Europe are practically at recession levels and the US could follow.
A long-term inflation rate of 2% for anyone who has recently visited the US is quite difficult to fathom.
Stagflation - like in the 1970s - appears to be a real possibility.
With the rout in technology’s shares, maybe a little money could trickle down into the mining stocks.
Dow Theory Sell Signal
A favorite and reliable indicator from the famous newsletter writer, Richard Russell, is the Dow theory sell signal.
The sell signal occurs when the two main indices, the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA), make a succession of lower highs and lower lows. For a trend to be established, the indices must confirm each other, and volume must confirm the trend. The trend is generally in place until a clear reversal occurs.
This has now occurred, so Richard Russell would certainly have told subscribers to exit this overvalued market.
This indicator is not too fashionable because it is said to respond too slowly, and to be late in the game. Nevertheless, it has a pretty good track record.
The recent positive performance of the 60/40 stock-bond portfolio is a thing of the past. Bonds have enjoyed a 40-year bull market, which is now over.
As for the S&P 500, it rose from 666 in early 2009 to 4263 now after hitting an all-time high of some 4800.
Academic studies show that when markets trades at historically high valuations, which is certainly the case today, the forward 10-year real return is nothing to write home about.
In sum, undervalued quality mining stocks are a clearly a better alternative in what the famous
Crescat team call the coming, “the Great Rotation”.
In the coming days and weeks, we will highlight some remarkable values in the mining sector.
Disclaimer: SGL does not provide investment advice and is not a registered investment advisor. Always do your own due diligence before making an investment. Investing in securities, especially junior miners, can be risky and never invest money you cannot afford to lose. SGL cannot guarantee the accuracy of the information in this post. SGL has attempted to present the information fairly, but it may own shares of the stocks mentioned in this article so bias cannot be excluded. SGL may buy or sell shares at any time.
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