Monday, January 28, 2013

"Wealth: any income that is at least one hundred dollars more a year than the income of one's wife's sister's husband." --H. L. Mencken

GOLD MINING SHARES ARE SET TO REPEAT THEIR BEHAVIOR OF 2006-2008 (January 29, 2013): During 2006, gold mining shares and their funds including GDX slumped to a deep bottom, rebounded, and then retested that bottom with a higher low before recovering again. In August 2007, gold mining shares slid again, nearly revisiting their lows of 2006. Most investors became strongly gloomy toward gold mining shares, especially since the broader equity market at that time had been setting new all-time highs every few months. Many investors concluded that gold mining shares were "hopeless". Then, from August 2007 through March 2008, while most equity subsectors moved up and down with little overall change, gold mining shares rallied strongly. Beginning in March 2008, gold mining shares then plummeted, with GDX losing more than 72% of its value from top to bottom before being among the first equity subsectors to complete its bear-market bottom near the open on October 24, 2008.

Why is this relevant for today? It's because the behavior of gold mining shares in 2012 was almost identical to the activity in 2006, with a slump to a deep bottom, followed by a partial recovery, and then another pullback to a slightly higher low. Just as in 2007, the following year--in this case 2013--has experienced a renewed plunge to yet another higher low just above the May and July 2012 nadirs. Many investors in gold mining shares today, as in August 2007, have become frustrated from seeing many other equity subsectors including the Russell 2000 reaching all-time highs, while the shares of precious metals producers have been badly lagging.

What is likely to occur in 2013 and beyond will be a repeat of 2007 and beyond. As most equity subsectors fluctuate back and forth with some volatility, some new all-time highs, but little overall net change during the next several months, gold mining shares will rally strongly as they had done from August 2007 through March 2008. It will be important to participate in this uptrend, as the total increase from bottom to top could be 50%. It will be equally essential not to become too greedy and to hold on too long, because the subsequent downtrend ending perhaps in 2014 or 2015 could be roughly as severe as the 2008 collapse.

The financial markets will always act in whichever manner will harm the greatest number of investors. Now that so many diehard gold bulls and other participants have bailed out of their holdings in gold mining shares, the fewest people would benefit from a powerful move higher. Once everyone gets excited and jumps aboard the bandwagon later in 2013, the greatest number of participants would be punished by a subsequent plunge, so that is what must happen thereafter. In 2014-2015, gold mining shares will likely once again be among the earliest equity subsectors to complete their next bear-market bottoms, perhaps as much as a year or more ahead of well-known general equity indices including the S&P 500 index.

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, KOL, VFWPX, XME, EWZ, REMX, SLX, VEMPX, VINIX, RERGX, TNRPX, VGPMX, TRIEX, FCG, TRSPX, ACTIX, and GDX. On January 28 I sold all of my RSX, TAN, and NLR, and one fourth of my VFWPX, VEMPX, VINIX, RERGX, TNRPX, TRIEX, TRSPX, and ACTIX.