It's hard to imagine an investment sector that's more hated than gold mining is today. The junior gold mining sector in particular, is so oversold at the moment, I believe it will at least triple over the next 6-18 months, with select stocks rising much more than that.
Those who rushed into gold and mining stocks near their peaks a couple of years ago have now been thoroughly punished for their folly. Gold bugs who bought in at much lower prices have also been spanked this year. Even clients of mine, who I positioned AFTER gold's epic plunge earlier this year, are currently behind on their positions.
At times like this, it's important to look at the facts and ignore the noise. One of the best researched and written articles I have found recently is by my colleague, Adam Hamilton.
I suggest you read the entire article as it explains why my prediction of tripling junior gold mining prices may be conservative if anything. Hamilton summarizes that:
- "The bottom line is gold stocks are as unpopular today as they've been since the end of the last secular gold bear. They are now priced as if gold was just 30% to 60% of its prevailing price levels, which is truly fundamentally absurd. Gold stocks weren't even this low relative to gold in 2008's stock panic, after which they more than quadrupled. An even bigger mean-reversion upleg is due out of today's greater anomaly.
But only contrarians will reap these massive coming gains. It is exceedingly hard psychologically to fight the crowd, to invest in sectors cheap and loathed rather than expensive and loved. But investors will gradually return, they always do after extreme fear drives prices way too low fundamentally. Gold stocks trading at secular-bear price levels relative to gold is just too enticing to keep smart capital away for long."
I agree with Adam completely. In the words of another man I admire, Doug Casey, "either you're a contrarian, or you're road kill." Right now the popular trade is to be long US equities and no one "in their right mind" would consider buying gold mining stocks. Stop and realize how illogical this is. The last time we were experiencing all-time highs in the US stock markets it was late 2007 and let's remember what 2008 was like.
The following chart of the S&P 500 index over the past 20 years paints an important picture for anyone who wishes to avoid becoming road kill again over the next couple of years.
While the above chart clearly indicates the upcoming risks, let's take a quick look at the opportunities. The last time we transitioned from a multi-year bull market into a bear market, we saw commodities rise quickly and sharply. The following chart shows the last transition, compares commodity prices in blue with the S&P 500 in red.
Commodity Index vs. US Stocks (click to enlarge)Click to enlargeAs you can see above, it took less than a year for the commodity index to rise 80% as the US stock market found its eventual peak and began declining. This all happened in an environment that was absent of quantitative easy debasing the currency. Now we have the Fed and central banks worldwide in a race to see who can issue the most currency.
Of course, in late 2008, everything (but US treasuries and the US dollar) fell off of a cliff together, so the current commodity trade is certainly not intended to be a long term hold. The only reason I suggested it could take 6-18 months for junior gold mining stocks to triple is because it's not obvious to me that the US stocks markets have indeed peaked yet. While I believe they are very close in percentage terms, it could be a few more months before they ultimately peak.
The way copper, emerging markets and now energy prices have been reacting, I suspect the transition from bull to bear markets in US stocks is imminent, if not already (subtly) underway.
One thing is for certain and that is that gold mining stocks are absurdly undervalued at the moment and that will not last indefinitely. While it is possible to see more weakness in the short-term, there's no guarantee of that either. The recent Fed taper may have been the final blow to a gold market that is about to explode to the upside. Even if there is a remaining 20% downside risk in gold miners, the eventual tripling in prices far outweighs those risks I believe.
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