Investors are all too familiar with the KABOOM in precious metals prices in the fall of 2011 and the echo that's still reverberating. Three years later, Jeb Handwerger, founder of GoldStockTrades.com, believes it could be the broad market's turn, and soon. In this interview with The Gold Report, Handwerger explains why it's important to position yourself for some fall fireworks.
The Gold Report: On June 11, on GoldStockTrades.com you wrote, "Some of my charts are showing a potential reversal in the precious metals." What are those charts telling you in late July?
Jeb Handwerger: In early June, it appeared that the junior miners - tracked by the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ), which I use as a proxy for the junior gold miners - was making an inverse head-and-shoulders pattern between $34 and $35. Then the junior miners had a very strong rally in June, with an intraday high of $46. Now we're forming what I believe is a potential crossing of the 50-day and the 200-day moving averages - a golden cross. This could signal the final turn from a secular bear market to the beginning of an uptrend.
TGR: Is gold close to a golden cross?
JH: Yes, it did in early July, and I believe it will hold. Gold is now trading below both the three-year and five-year moving averages. That's very rare. The last time we saw the gold price move below the long-term moving averages was in the 1999-2001 bear market. If you can get gold at a discount, then it's a great opportunity. The greatest opportunity may be the Philadelphia Gold and Silver Index (XAU), an index of 16 gold miners.
The miners are usually closely correlated to gold, but are much more volatile. For instance, in the 2008-2009 correction, we saw the Philadelphia Gold and Silver Index decline from 200 to below 80 - more than a 50% decline - even though gold only corrected from $1,000 per ounce [$1,000/oz] to $700/oz.
Now we're seeing higher lows in the $1,200/oz range, and the Philadelphia Gold and Silver Index is trading around $100. If gold moves up even $50 or $100/oz, the miners and the index could have much larger percentage gains, so the leverage opportunity is really in the miners. The miners outperformed gold by a wide margin from 2000-2008.
TGR: Should investors buy the ETF or the miners?
JH: If you're able to beat the Market Vectors Gold Miners ETF (NYSEARCA:GDX) and the Market Vectors Junior Gold Miners ETF, then buy them directly. I try to find companies that outperform the large producers and their junior peers. If you find companies that are leading both in fundamentals and technical data, you have a good chance of beating the indexes.
TGR: What ranges do you expect gold and silver to trade in at the end of 2014?
JH: The three-year trailing moving average is around $1,510/oz; the five-year is about $1,415/oz. That is where gold should be trading. Throughout the 2002-2011 rally, gold was trading at a huge premium to the three-year and five-year trailing moving averages. Now, it's trading at a discount.
TGR: What about silver?
JH: The long-term charts for silver and the Philadelphia Gold and Silver Index are closely correlated and leading indicators to gold; silver and the miners will usually top a few months ahead. They were also the strongest gainers after the 2008 crash. Silver has pulled back to that crucial $20/oz range - a major breakout point in 2011, when quantitative easing was announced and silver ran close to $50/oz. Now that it has pulled back to that breakout point again, silver should provide leverage and outside gains to gold.
I also like platinum group metals. In 2012, I became bullish on platinum and palladium because both were trading at a discount to gold. Palladium is now breaking out on concerns about supply from South Africa and Russia, while industrial and investment demands are increasing. There are few platinum group metal major assets. Investors should check out the juniors with advanced platinum group metals resources in North America.
TGR: In the same June 11 commentary, you posited that institutional buyers were returning to junior mining equities. What are some signs that you're correct?
JH: One sign is a huge uptick in volume in the Market Vectors Junior Gold Miners ETF. The volume increase in the first seven months of 2014 has been exceptional, whereas volume is decreasing in a rising market in the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), an ETF tracking the S&P 500. The rising volume in the juniors may indicate accumulation, whereas decreasing volume in a rising market may indicate that the rally in the S&P 500 is overbought and running out of steam. The equity market has not had a significant correction in more than three years, and it's dangerous territory for a correction.
To be clear, by institutional buyers, I meant value investors. Value investors are buying junior mining companies at book value per share [Note: cash on the balance sheet/share float] that is double or triple the market caps. There are other companies that have spent millions on their projects, yet the market cap is only a fraction of what they have spent. I've spoken to fund managers that I haven't spoken to in years, people who have made money in previous cycles and have been out of the market. Those people are finally dipping their toes back into the junior sector.
TGR: Are you expecting a broad market correction in the near term?
JH: Yes. That's why I'm expecting inflation to pick up, and that's going to make things difficult for some of the overvalued equities. I see a big rotation from the overbought large-cap equities into the small-cap base and precious metals junior miners and energy plays. I expect the fall to be quite busy. After Labor Day, we're going to see some fireworks.
TGR: On June 25, you wrote, "Investors need to pick carefully in the junior mining space and research the asset, share structure, balance sheet, jurisdiction, growth profile and investigate to see if management is ethical." Let's examine those criteria more closely, beginning with assets.
JH: If you think gold is going to be flat, you have to ask: Will this company survive at the current gold price? If it's a high-cost mine, it's going to have more challenges, yet a low-cost or higher-grade mine can usually withstand difficult times.
Good financial backing is also crucial. Most of the companies I follow are oversubscribed when a financing is offered. I stay away from companies that are desperate for money.
Share structure: I like a company that doesn't have too many shares outstanding. The ownership mix would preferably be a good institution that's a long-term investor with around 19.9% ownership. I like finding companies with a significant position held by a major producer or a well-respected fund, because they have done a lot of the homework for you. Those companies have strong geological and technical research teams.
Balance Sheet: Cash that equals something close to 20 times the active burn rate.
Jurisdiction: There's a lot of geopolitical risk in today's world. Stable jurisdictions are at a premium. Some of the majors have had to take huge write-downs in places like Argentina and Chile, whereas investment interest is growing in places like Nevada. Nevada has by far the most economic gold mines.
TGR: Please give our readers one final thought to ponder.
JH: We're in a period known as the summer doldrums, yet we're seeing a lot of activity in precious metals. There is geopolitical instability both in Eastern Europe and the Middle East. The potential for black swan events is increasing, and that is the fuel that lights up the gold sector. We could still see another pullback, but post-Labor Day should bring a powerful seasonality effect. Now may be the time to position in August for what I believe is going to be an exciting fall season for precious metals and the junior resource sector.
TGR: Thank you for talking with us, Jeb.
This interview was conducted by Brian Sylvester of The Gold Report.
Jeb Handwerger is an author, speaker and founder of GoldStockTrades.com. He studied engineering and mathematics at University of Buffalo and earned a Master's degree at Nova Southeastern University. After teaching technical analysis to professionals in South Florida for over seven years, Handwerger began a daily newsletter, which grew to include thousands of readers from over 40 nations.
1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor.
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