Thursday, December 20, 2012
"The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore." --Vincent van Gogh
The most important factors impacting the prices of gold mining shares of course include the prices of gold and silver which have been notably depressed. However, another critical element is the U.S. dollar which has a strong inverse correlation with the yellow metal and its shares. The U.S. dollar index earlier this week dropped to its lowest point in three months. Meanwhile, the S&P 500 and other funds of commodity producers have been climbing energetically in recent weeks; these have a long-term positive interrelationship with gold mining shares. Thus, GDXJ is not only undervalued in an absolute sense, but it has fallen far out of line with its peer group. As it inevitably catches up, it will likely end up gaining about twice as much in percentage terms as many of my other favorite cyclical equity funds which are listed below and which I have discussed in detail in previous postings (visible below) during the past several months.
In early 2008, many investors believed foolishly that outperforming emerging markets including Brazil and Russia could continue to rally while U.S. equities retreated. This "decoupling" theory proved to be nonsense; eventually, the above markets plummeted far more than the S&P 500 in order to correct proportionately for their temporary outperformance. In August-September 2011, many others thought that gold mining shares could keep climbing while other equities slumped. This also proved to be spectacularly wrong. Those who believe that there is a logical "reason" for gold mining shares to act differently from other shares of commodity producers aren't properly respecting the historical record. I wouldn't sell shares of coal mining companies and similar assets which could gain 20%-30% during the next several months, but I think that gold mining shares will end up rising by 40%-50% in order to compensate for their recent lagging behavior.
Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they are forming higher lows. From my largest to my smallest position, I own GDXJ, VFWPX, KOL, XME, EWZ, REMX, SLX, VEMPX, VINIX, RERGX, RSX, TNRPX, VGPMX, TRIEX, FCG, TRSPX, ACTIX, TAN, GDX, and NLR.
Posted by TrueContrarian at 10:02 PM