Precious Metal Stocks: A Money Flow Selling Climax, And Now The Tide Has Turned

by: Russ Winter

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At the end of a severe bear market, or at the end of a frothy bull market, one reads many post-facto articles. In yesterday's Wall Street Journal, for example, there was a ring the bell article about the complete and total liquidation of hedge-fund and speculative interest in precious metal stocks. It mentions that money under management in Sprott Resources precious metal stock hedge funds have been reduced from $3 billion in 2008 to $350 million. The latter probably is a 3Q number that has been driven even lower by the endless taper talk and Comex paper shorting rout in the 4Q. This confirms that the historic liquidation has run its course and that the well of supply is completely dry.

How much more selling is really left in Sprott's or similar funds, or for that matter in the GLD ETF? The latter has liquidated all the gold, plus some that was added going back to Lehman Brothers. And how much more additional naked-paper shorting to producers and bullion bankers can slingers muster? Nominal would be my estimation [see "One for the Ages"].

Rick Rule of Sprott just conducted an interview about this flow of funds situation and offers some color on what's transpiring. I give his last comment first because it points to the timing of what's potentially a real turn in sector money flows. I think he is hinting that the money flow worm has turned from a selling climax to a gearing up phase.

"So all things considered, I have to say the events that have transpired over the last month have made me much more bullish in terms of timing than I would have been six weeks ago," Rule said. "First, has been with regard to our Sprott mutual funds. We are seeing net inflows, as opposed to redemptions, for the first time in a long time.

Note: The following is in regard to the Zijin deal that I wrote about several weeks ago [see "China's Precious Metal Mines Running Out Of Reserves"].

"We recently signed and funded a joint venture with the incredibly large Chinese state-owned mining company," he said. "This will show that outbound investment by the Chinese government into the junior mining sector, which is what we've specifically been charged with, is alive and well."

"We expect to be able to announce a similar joint venture with another name-brand Asian investor by the end of 2013. Once again, this is testimony to the fact that Asian strategic investors are back in the junior mining sector in earnest," Rule said.

"Our Sprott institutional lending fund, where we aim to raise $350 million for our lending business, is very close to securing an extremely strong cornerstone lead-order from a name-brand North American institution.

"I did a couple of days of marketing around the city of London with our CEO. We were seeing some of the bigger accounts in the city of London. The bottom line is we received an awful lot of interest in what we were doing."

One would think that value investors from outside the industry would be all over this vacuum. Adrian Day's fund was able to buy 5% of Vista Gold for less than a million and half dollars for heaven's sake. This is going to accelerate.

Teranga's (OTCQX:TGCDF) very bullish $135 streaming royalty deal with Franco-Nevada (FNV is also a bell ringer. I say this because it has all the hallmarks of a smart, private company builder transaction that is shareholder positive. Further, it refutes the notion that there is no activity in the space and gives an indication of how professional value investors like Pierre Lassonde value situations. Incidentally, FNV has $1.3 billion in capital for acquisitions.

Before the deal, this went completely undetected by the "market." Teranga was trading in a dull, vacuum-like manner, much like the rest of the sector. The good news is that the stock actually responded with a 32% rally on the news. Teranga will soon become a large producer and has the full backing of the government of Senegal, which has a stake in the deal. In fact, I have it from good sources that Senegal helped pushed this deal through. Hats off to Teranga management for consolidating this high potential district without any shareholder dilution.

Disclosure: I am long GM:OTCQX:TGCDF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.