As a long time fundamental and technical analyst who focuses heavily on the precious metals and miners sector, it never ceases to amaze me at how truly emotional investors are when it comes to this sector. Truth be told, there are great long term opportunities in this sector, but how one enters to build a portfolio of miners can make an enormous difference to long term performance. When I read various articles written by analysts who focus on this sector, what quickly comes to mind is the quote by John Maynard Keynes – “The market can remain irrational longer than you can remain solvent”.
While there are indeed opportunities for exceptional gains to be had in this sector in the long term, investors should be cautious about when they allocate capital into this sector, and how they choose to build a portfolio of individual miners. Allow me to explain.
We view the late 2015 low in the HUI Gold bugs Index, and in GDX (NYSE:GDX), as a Cycle Degree Wave II, suggestive that the long term low is most likely in for many years to come. However, most individual mining stocks are highly suggestive that the sector will provide investors the opportunity to allocate capital at lower prices than exist today. The reason this is important relates to the extreme moves in the individual mining stocks. As an example, if a long term investor is seeking to build a portfolio of 10 individual miners, they might very well have to endure 20-40% or more of downside of pain before a final low occurs. That is effectively 20-40% more shares they could purchase for that portion of their capital they intend to allocate to this sector.
Viewing the following GDX chart, we see two possibilities that are most probable:
- GDX bounces from current levels of $22.61 per share up to $28-29, only to resolve down to the $17 region before a final low is struck; or
- GDX continues its present decline directly into the $17 region.
If possibility 1 occurs, we would expect gold to follow the Alt. path of a bounce to the $1,330 region, which would have the gold bugs screaming for higher, only to see their dreams thwarted one more time by a swift decline to lower levels. In either expectation, we still expect lower before higher, and in both expectations we see a phenomenal move higher over the next 12-18 months.
A move in gold to $1,209 - $1,172 that holds would – in Elliott Wave vernacular – provide a formidable (i) (ii) (1) (2), as seen on the following weekly chart of gold. However, a bounce to the $1,330 region will by no means ensure that the low is in, and would match nicely with a move in GDX to the $28 region before heading down in a c-wave move for a final low in the 17 region.
Another anecdote I would comment relates to the formation of a portfolio of miners. I’ve observed services that provide portfolios for investors of 50-70 individual mining stocks. This approach is completely impractical and unnecessary. The formation of a small portfolio of 8-10 individual stocks in this sector, when chosen correctly, is all that is needed to take full advantage. Effectively managing 50-70 individual stocks for an individual investor is a near impossible task that is unrealistic. The disparity between what comprises a good company vs. a great company in this sector is as wide as the Atlantic Ocean. A solid fundamental view of one company vs. another, comparing enterprise value, management, and proven and measured reserves will enable one to select a small portfolio of extremely undervalued stocks that will far outperform the sector at large.
Our expectation is that the sector will form a bottom between August of this year and early January, 2019. The upside is tremendous, but don’t suffer from the age long “fear of missing out” syndrome by entering too early, and don’t build a portfolio that is unrealistic to manage. Spend your time in the coming months determining those companies that offer the best upside potential with the least downside risk.
