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Collecting DUST: Gold Stocks Need A MIRACLE!
Gold stocks, and for that matter, most natural resources shares, are incredibly pressured and under duress.
It’s not as bad as it was in 2015, when bankruptcies and liquidations were frequent. 2016 was a phenomenal year, and companies were quick to raise funds and cash-up, but the sentiment is horrific; the trading volumes are down significantly and now, gold and silver prices are joining the mud pool, by falling to $1242 and $15.85, respectively.
There are so many moving parts, which are impacting gold prices, at the moment, and other factors, which are putting severe downward stress on mining stocks, as well.
The price of precious metals is highly sensitive to investment demand, since most gold products are coins, bars, and jewelry, but, as you know, jewelers negotiate prices down, since they want to make a profit, whereas investors bid the price up, since they do not want to sell their chaos insurance position, until the storm has passed, if ever.
What’s critical to understand is that individuals, middle-class America, who still remember the horrors of the 2008 crash, were the ones buying precious metals, gold and silver bullion, and storing it, throughout the ’09 to ’11 period.
Since all investors have a short-term memory bias, which directs their thoughts to the immediate past, not the distant one, coin sales in the western world, the U.S. specifically, are virtually down to nothing, since that memory of the Great Recession is fading out.
There is no bid for the upside anymore.
As you know, large institutions, such as funds, buy the GLD shares, the gold-tracking ETF, so they aren’t actually causing demand constraints, since these are leveraged paper contracts with little physical gold backing them and they’re not asking for physical delivery.
Put differently, ETF trading does not create immediate supply issues for the gold or silver industry, and this is precisely what’s going on right now.
It’s a unique dynamic, by which ETF demand is on the rise, but it doesn’t cause a surge in spot price for the metals.
The same investors, who were buying coins, bars, and bullion, in general, during the ’09-’14 era, are the ones, who also speculated with mining shares, during this same timeframe.
In the bull market, ’09-’11, they made a bloody fortune, but what our proprietary back-testing surveys reveal, is that many of them used those profits, nearly all of their massive returns, to double down at $49 silver, seeing their profits dwindle down to a shadow of their previous selves, when the bid collapsed.
At this point, gold investors are frustrated with the price suppression by the COMEX, the lack of inflation on the government’s official statements, and the incredible performance of the stock market, fueled by central banks and share buybacks.
Many, at this point, have thrown in the towel.
Couple this with the fact that there are ETFs today, which are one-click ways for gaining index exposure to a basket of gold stocks, silver stocks, or commodities stocks, big or small, domestic or foreign, and you’ll see why junior miners, which are not part of any ETF nor components of liquid funds, are an existential threat.
Courtesy: U.S. Global Investors
Gold stocks are CHEAP, but the major-cap players are waiting until the management teams of the quality juniors beg the big behemoths to help them out.
They’re in no rush to make acquisition bids, but the wild card is Asian metals demand. If it continues to remain strong and robust, the majors will have little choice, but to replace their depleting mines with new projects by merging with the smaller companies, causing a rally, more significant in scope, size and length, than 2016 ever was.
As you know, exploration efforts have been largely unsuccessful for years, so they will concentrate on proven resources, the NI 43-101 compliant resources.
It’s insanely challenging, sometimes to the point of utter surrender, to dollar-cost average positions and hold them, through thick and thin, because they trade like bottomless pits. But through proper position sizing and discipline, investors in commodities must remain patient, when prices are undervalued.
The reason these companies need a miracle is that the stock market is using share buybacks to continue rallying, but Wealth Research Group believes these days are numbered.
All told, though, it can take another 12-24 months before the bear market of mining stocks finally ends its brutal cycle, which started in 2011, had a brief breakout in 2016, and resumed the carnage for the past two years.
It’s an individual choice, how much to risk, how long to hold, and how to allocate funds to dollar-cost averaging, but there’s no simple answer here or a comforting solution, at this point.
All stocks experience irrational investor behavior, even the mighty Berkshire Hathaway had a 59% drop between ’73 and ’75, but had you sold, you’d have missed out on one of the greatest financial success stories of the 20thcentury. People, who have done that, lost out on millions of dollars.
It’s a fact of life.
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