In my recent article I espoused the benefits for investors to identify fundamentally sound mining companies, and illustrated how buying the right company would substantially enhance performance. However, this analysis is incomplete without consideration of the future performance of the entire metals and miners sector. In this article, I will discuss: 1. my expectations for Gold, Silver, HUI Gold BUGS Index, and GDX; 2. the proper way to construct a portfolio of miners; and 3. Investor expectations for returns.
Price Level Expectations – Gold, Silver, HUI Gold BUGS Index, and GDX
As I discussed in my prior article, metals are in a cyclical correction within a long term secular bull market. I compared the pullback off the 2011 high into late 2015 as akin to the cyclical retracement that occurred when gold dropped from its high of $190 per ounce in 1975 to a corrective low of $104 in 1976, and then followed up with a rally from $104 to $650 from 1976 to 1980.
Since the low in late 2015 we have seen what counts best as an impulsive 5 wave up into August 2016 that we have labelled as an Intermediate Degree Wave circle ① – see HUI Gold BUGS Figure 1. Since the 2016 high, we have seen what best counts as an (a) (b) (c) structure for wave circle ②, which represents the area of opportunity for investors to allocate to a portfolio of mining shares – see Figure 1.
Note that this EW structure matches perfectly to that of Gold and Silver –Figure 2 (NASDAQ:GOLD) and Figure 3 (Silver).
Hurst Cycle Timing and forthcoming rally
The Hurst Cycle timing strongly suggests a low to occur in the HUI Gold BUGS Index on or near the first week of January 2018, followed by a substantial rally through October 2020. See Figure 4 (Hurst Cycle HUI Gold BUGS Index) provided by Mike Richards with Time Price Analysis.
Based on a log scale Fibonacci calculation for the extension of the move off the 2015 low, an expected move up in the HUI Gold BUGs Index would suggest an increase from approximately 125 in January 2018 to 1453 into the October 2020 time frame. This is an 11.6 fold increase in the HUI Gold BUGs Index, and would result in a simultaneous move up in Silver to $70 per ounce and in gold to $2,100 per ounce.
A Rare Opportunity Indeed
It is an extremely rare instance where the larger degree Elliott Wave count matches so nicely with the larger degree timing posed by Hurst Cycles, and affords investors a short span of time (3 years) to accumulate massive returns from the miners sector. A typical Elliott Wave impulsive pattern is a 5 wave move, where wave 3 is typically the largest wave within the structure. However, metals and miners typically provide extensions in either the 3rd or the 5th wave. This would mean that a move in the HUI Gold BUGS Index to 1425 is the minimum expectation in an impulsive move off this coming low, with the potential to be much greater.
The combination of technical signals (Elliott Wave and Hurst Cycles) is suggestive of a high confidence long term opportunity for investors to purchase shares of fundamentally sound miners with excellent reserves.
Constructing a Miners Portfolio
A “diversified” approach to establishing a miner’s portfolio is “always” a good idea, but a common misconception is those who suggest owning a large number of stocks in a miner’s portfolio (i.e. 30, 50, 70 or more individual miner stocks). Owning a mix of small, medium and large cap miners with solid reserves, management, and financials will provide an investor the better results. Effectively managing more positions is unrealistic for most individual investors. More than 10-15 holdings make it difficult to exit a portion during deeper consolidations, hedge, or stay attuned to the technical and fundamental components of one’s miner’s portfolio. Owning a proper mix of the “right” mining companies, consisting of the “best in class”, will easily accomplish one’s goal to capitalize on the forthcoming rally in metals.
Presently there are more than 1,000 publically traded mining companies worldwide. The public companies consists of micro-cap, small cap, medium cap, and large capitalization in their size. There are a number of different types of miners, most of which fall into one of these categories:
- Gold Miners
- Silver Miners
- Gold and Silver Miners
- Other metals Miners (platinum, palladium, indium, rhodium, mercury, etc.)
- Royalty companies (hold mineral rights and collect royalties from mining production)
- Resource Hoarding Companies (companies that acquire, hold, and entitle reserves)
Mining reserve jurisdictions are throughout the world on virtually every continent. Jurisdictions for mining reserves range from places like the US, Mexico, Australia, Ecuador, Peru, Canada, Turkey, and various countries in Africa, as well as many other countries.
The first thing to consider when choosing a miner for your portfolio is their jurisdictional risk. The regulatory environment varies between countries, with some countries having well established mining laws, and others being less stable or unstable.
After a review of a company’s jurisdictional risk, then reserves owned by a mining company become front and center in determining overall value. Absent solid reserves in a favorable jurisdiction, we have no interest in pursuing a company any further. There are simply too many great companies with reserves located in stable jurisdictions to consider one’s in unstable environments.
Publicly traded mining stock prices have a high elasticity to the underlying metals. As metals prices drop, mining stocks – as a percentage – drop substantially more, or as metals prices increase, mining stocks – as a percentage – increase substantially more. To illustrate this point, from October 2008 through September 2011 Gold grew from $679 to $1924, or an increase of 183%. During this same time, the HUI Gold BUGs Index great from 150 to 639, or an increase of 326%. From September 2011 to present, Gold prices have fallen from $1,924 to $1,268, or a 34% decrease. During this same time, the HUI Gold BUGs Index has fallen from 639 to 184, or a 71% decrease.
In order to build a portfolio of Miner shares, one would start with the entire body of individual public companies, and exclude all companies that don’t exhibit the following attributes:
- Reserves in stable jurisdictions
- Solid reserves relative to market cap
- Financial stability
- Ample stock liquidity
One would then turn their attention to a number of value metrics that to further exclude companies from a final bucket list.
The ultimate objective is to establish a portfolio of mining companies with solid and accessible reserves in stable jurisdictions that exhibit solid financials, and with capable management who can provide for maximum production during a rising metals environment.
There are enormous disparities in the performance of one miner vs. another
Recently someone suggested to me that purchasing an ETF (i.e. GDX or GDXJ) would result in the same returns for individual investors. I would adamantly disagree with this statement. To illustrate my point let’s look at the Elliott Wave forecast for the future price of Seabridge Gold, Inc. (NYSEMKT:SA) Figure 5 (provided by Mike Richards with Time Price Analysis).
Note that at the same time a logarithmic extension for the HUI Gold BUGS Index suggest an 11 fold increase, a similar extension for SA suggests of a 23 fold increase. That’s the same as saying $10,000 in an ETF that tracks roughly with the HUI would increase in value to $110,000, while the same $10,000 invested into SA would increase to $230,000.
- A very rare instance where the large degree Hurst Cycle timing matches nicely with the large degree Elliott Wave structure is nigh upon us, thus creating an incredible opportunity for investors willing to own a portfolio of miners.
- Upside price targets in the precious metals mining sector are substantial.
- It’s not the number of individual mining stocks one owns that makes a miner’s portfolio effective, rather quality of the portfolio candidates.
- A diversified portfolio of the “correct” 10-15 miner stocks will significantly outperform larger - convoluted - portfolios by allowing one to effectively manage the portfolio through the cycle.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
Additional disclosure: Brian Fletcher is a Senior Research Analyst and manages the Strategic Miners Portfolio (“SMP”) for Time Price Analysis (www.timepriceanalysis.com).