Time for Gold Miners to Decouple?

Includes: GDX, GDXJ, GLD, SLV
by: Jeff Nielson

My first inclination when I formulated this title was to leave out the “question mark”. Now is clearly the time that precious metals miners should decouple from the broader market. However, as we all know, what should happen (in our manipulated markets) and what does happen, are usually two different things. To borrow the old adage, “the market can remain irrational longer than you or I can remain solvent.”

All the same, my own investment philosophy is that I would rather be “early” in arriving to an under-valued sector/asset-class than to hop on the bandwagon with the rest of the sheep as they chase the latest flavor-of-the-week. Indeed, to my mind, nothing speaks louder about the attractiveness of other sectors than the pronouncement by virtually all of the market experts that “buy and hold is dead”.

As I regularly tell our readers, “buy and hold” is certainly not dead when it comes to the precious metals sector. After nearly a ten-year bull-run, the fundamentals are much more bullish today for this sector than when this bull-market began. On this basis alone, cautious investors who want to ensure that their capital doesn’t get sucked-into one of the many economic “black holes” which threaten to devour our economies should have already loaded-up on these safe, conservative investments.

True, investing in precious metals miners means living with volatility that makes a roller-coaster seem tame in comparison. However, simply stretch-out the time horizon by looking at long-term charts, and (as with everything else) much of the (short-term) volatility disappears from the picture. What remains are simply the most-bullish collection of charts in all of our economic sectors.

With bullion prices close to nominal highs (for the current bull-market) and with oil prices having pulled-back substantially, profit-margins have recently exploded for these energy-dependent companies. At the same time, the effort by the anti-gold cabal to dupe investors into believing that precious metals are no longer a “safe haven” has clearly failed.

Every day, more mainstream analysts become born-again “gold bugs”, and immediately proclaim precious metals as the one, safe haven for investor wealth. What this means is that precious metals will outperform in any crisis situation (i.e. deflationary scares), and we already knew that they would outperform in any bullish, high-growth/high-inflation scenario.

This immediately separates precious metals from every other asset class. With the precious metals miners providing natural leverage to precious metals, holding a basket of these companies is truly a “no-brainer”.

As I regularly counsel people, this “outperformance” doesn’t make these companies 100% immune to any market-contraction (which is why we must all avoid “margin”). In a true “panic”, everything will plummet lower (except for gold and silver, themselves). However, here is the key point for investors to keep in mind: you can try to “time the market” – and to exit just before the (potential) “crash”, and to re-enter once the market bottoms. This is an extremely difficult “trick” even for the savviest market experts.

If we accept, as average investors, that it is highly unlikely that we will be able to “out-think” the market – and exit and re-enter at the perfect time – then we must accept that in the next panic we will likely be caught being close-to-fully-invested. Thus, what prudent investors should be thinking about is: which companies will be first to bounce-back from any panic?

I strongly suggest that an entire sector of companies reporting “record profits” quarter after quarter clearly tops that list. True, there are other companies also reporting “record profits” these days. However, unlike a Wall Street bank, the “record profits” being earned by gold and silver miners are not dependent on utterly fraudulent accounting, and endless government subsidies and hand-outs.

Moreover, a huge gulf is emerging between mere paper “currencies” and real “money” (i.e. gold and silver), which becomes more and more apparent to people in the West (the rest of the world already knows this). As this chasm widens, there will obviously be a decoupling between companies which merely earn “paper profits” (in a world where that paper could go-to-zero any day), and companies which produce the world’s best money.

It is a matter of simple arithmetic that there isn’t nearly enough bullion in the world to allow every investor to hold even a minimal, 5 – 10% weighting in gold and silver. With investor portfolios comprised of roughly 1% precious metals, increasing that weighting by five to ten times basically means ratcheting-up the price by five to ten times – the only way that our thin supplies of bullion could be evenly distributed amongst us.

What this directly implies is that as bullion prices soar, bullion-hungry investors will be looking for the next-best-thing to holding gold and silver, themselves. Obviously the miners are the perfect proxy. Not only are they direct “plays” on precious metals, but they leverage the price of bullion, and they can be slotted into people’s retirement portfolios – where they can appreciate over time, tax free.

This is an important factor for tax-conscious investors – who have gravitated toward “paper” bullion-products (most notably bullion-ETFs) in part because they are easy to incorporate into a retirement portfolio. I would suggest to investors that this is not the best way to manage the issue of taxation with respect to their precious metals holdings.

I remind readers of a previous commentary, where I made my case for the proposition that we will be able to hold our bullion, spend our bullion, and not face any adverse taxation. This leaves investors with plenty of “room” in their retirement portfolios for the shares of precious metals miners – which we expect to outperform bullion, and making these holdings perfect for retirement portfolios.

For readers new to these companies, or simply looking for ideas, we offer a large database of these miners – which not only focuses on the more prospective companies, but highlights the most important data for investors to assimilate. While new investors become familiar with these companies, the emergence of precious metals miners ETFs, and (more notably) junior-ETFs gives novices to this sector the opportunity to let someone else choose their “basket” of companies for them – until they are comfortable with choosing their own investments.

Silver investors, who also hold their collection of silver miners (like myself) will have noted the reference to “gold miners” in the title. This was a deliberate choice. The gold miners have clearly outperformed the silver miners over the past year – despite the fact that the gold/silver ratio is little different than it was at the beginning of this bull market.

The “explanation” for this price-divergence between the two groups of miners is that fears about the “recovery” make average investors much more cautious toward a commodity-producer, where the commodity is being labeled as an “industrial commodity”. While silver investors understand that this is a simplistic and inaccurate characterization of silver, we must accept that perceptions will be slow to change.

This will leave silver (and silver miners) more vulnerable to “panics”, and less-likely to break out than the gold miners. This does not mean I am advising anyone to move their silver investments to gold. This analysis presupposes that no “major event” occurs in the gold or silver market – such as a default, or a discovery of massive fraud with respect to bullion supplies.

With the silver market much, much “tighter” (for supply) than the gold market, this makes silver the prime candidate for such an event – which will occur without warning, and instantly cause the entire silver sector to soar higher (except for the “paper” ETFs). This means that silver investors do not have the luxury of waiting for some “cue” to enter this market. If you want to enjoy the explosive up-side of silver, you must acquire your position now.

Bullion remains the primary “insurance” for investor-portfolios against the monetary depravity of bankers, who steal-by-stealth from us – by rapidly diluting our currencies. Precious metals miners make the ideal growth-component for investor portfolios, to accompany this insurance. We need to maximize the potential of both of these asset-classes if we want to emerge from this generation of crisis safe and solvent.

Disclosure: None