In this article we are going to look at compelling evidence that the Precious Metals sector is either at or very close to a major bottom and see why the chances are high that the sector will rally strongly in the New Year.
You have all heard the old adages about “buying low and selling high” and how the time to buy is when there is “blood running in the streets”. Never have these adages been more applicable than they are now to the Precious Metals sector, where even the most diehard bulls have had enough and thrown in the towel.
The abysmal sentiment towards the sector is starkly illustrated by two of the indicators that we will now look at. The first of these charts shows the Gold Miners Bullish Percent Index, going back 7 years. On this chart we can see that only on two other occasions in the history of this indicator has sentiment towards gold stocks hit rock bottom at 0% as it has in recent weeks – once late in 2008 when the sector bottomed at the trough of the broad market crash and again in the middle of 2013, after which there was a rally before prices ran off sideways for over a year. When you get readings this low it basically means that there is no-one left to turn negative and no-one left to sell. By itself this bodes well for the sector.
In further support of the contention that we are at or close to a major low is the 20-year chart for the ratio of the large stocks XAU index over Gold which is at record low levels. The rationale behind this being bullish is simple to understand – when investors are fearful towards the sector and negative on it, they favor bullion over stocks, because they figure that while stocks can go to zero, bullion cannot and they are right about that. What they are not right about is being fearful when everybody else is fearful – which means there’s no-one else left to get scared and sell, as is the case now. When this ratio is at a negative extreme as now, it means that the mob are extremely and universally negative – and that has to be bullish. Right now this ratio is at astoundingly low levels – way below the levels it was at late in 2000, right before the start of the great gold and Silver bullmarket, and at the depths of the 2008 market crash – Precious Metals stocks have already crashed and are friendless.
Finally we have another powerful indication that the sector is bottoming in the volume pattern of junior mining stocks, expressed collectively in the form of the Market Vectors Junior Gold Miners (ARCA:GDXJ), whose 4-year chart is shown below. On this chart we can see that volume in GDXJ has ramped exponentially all this year to extreme levels, that must signify a bottom, because the sellers must by definition be “dumb” because they are obviously selling at a massive loss – so who is doing all the buying, taking the other side of the trade? – Smart Money, that’s who. The enormous recent volume in this is evidence of a massive transfer of stock from weak to strong hands, and since the new buyers are not going to sell until they have turned a profit, it is easy to understand that immediately an uptrend takes hold, new buyers are going to find no stock available and will have to drive prices sharply higher to get their orders filled.
Does this mean that most junior miners will survive? – sadly, it doesn’t – hundreds of junior mining companies can be expected to fail next year – it’s too late for rising stock prices to save many of them. What the volume in GDXJ is telling us is that Smart Money is looking beyond the cull to the New Dawn that will follow, when the better junior miners, especially those that are in production or close to going into production, will reap the benefits of having hunkered down and pulled through a very difficult time, which will be magnified by the extra savings resulting from low oil prices, with fuel being a major component of mining industry costs.
The worries about deflation dragging the sector further into the mud are a “red herring” – gold does well during deflationary times as old timers like Richard Russell will recall from the experience of the 30’s. So if we do see deflation, it should not prove to be a problem for the sector.
Finally, end of year tax loss selling will be over this week, so we are at a good point for a sector rally to start, as was the case last year.
The conclusion to all this is that we appear to be at an excellent point to buy the better mining stocks, and you shouldn’t have to wait too long before investments in the sector start to pay off.