Tuesday, October 15, 2013

"If hard work were such a wonderful thing, surely the rich would have kept it all to themselves." --Joseph Lane Kirkland

I STILL LOVE GOLD AND SILVER MINING SHARES (October 15, 2013): There are analysts who disagree about the future of the stock market, and there are other analysts who debate the future of the bond market. However, just about everyone agrees that investing in precious metals is hopeless, and that owning shares of the producers of gold, silver and platinum is even less likely to be profitable. As a result, precious metals mining shares are trading close to their lows of late June, and are not far above their most depressed valuations since the fourth quarter of 2008.

Since the last week of June, most mining shares have been forming several higher lows after they had slumped close to their lowest points in four to five years. The shares of coal producers, rare-earth extraction, steel manufacturing, copper mining, and similar industries have been in moderate uptrends. Since the final week of August, emerging-market equities which had plummeted to multi-year lows have been rebounding even more energetically. The currencies of emerging markets, which had become incredibly unpopular, have been progressively recovering. However, one major subsector hasn't participated in the rally. After initially climbing along with the rest, gold and silver mining shares began a retreat on August 27, 2013 which may or may not have finally ended after a dramatic percentage pullback. This has provided an unusually compelling opportunity for those who are ready, willing, and able to buy when nearly the entire mainstream financial media are proclaiming why it's hopeless to do so, and when even many longtime bulls are convinced that additional weakness is highly likely in the short run.

When almost everyone around you is telling you not to buy or to sell something, then it is almost always a very good idea to do the opposite. Near the end of the second quarter, we had all-time record insider buying relative to insider selling for gold and silver producers; we had the traders' commitments for silver and copper at all-time extreme commercial net long positions, with gold at its most exaggerated level since 2001; we had all-time record discounts to net asset value for numerous precious metals funds; we had all-time record outflows in the second quarter for nearly all assets in this category. Since the beginning of the summer, the price increases for gold and silver mining shares have been among the lowest of all mining subsectors or emerging-market countries with the possible exception of uranium producers (which are also a compelling buy).

Of my current favorite choices, GDX, is a fund of large- and mid-cap gold mining shares, while GDXJ consists of junior producers and would likely achieve even greater percentage gains during a meaningful rally. SIL is a fund of silver producers, and GLDX consists of gold exploration companies which are more speculative. If you are interested in an alternative, URA is a fund of uranium producers which has been an incredibly unpopular subsector and receives persistently gloomy media coverage.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers whenever they have been most disfavored. I completed selling many funds of general equities which I had bought near their important low points in 2012, and which I unloaded on a gradual basis from January 28, 2013 through May 3, 2013. In late August and early September 2013 I was aggressively buying the shares of emerging-market country funds. During the past several weeks, I have added moderately to my funds of precious metals mining shares, especially during their most extended pullbacks. From my largest to my smallest position, I currently own GDXJ, KOL, XME, SLX, GDX, REMX, SIL, COPX, SCIF, GXG, GLDX, RSX, VGPMX, ECH, EWZ, IDX, BGEIX, VNM, URA, ZJG (Toronto), PLTM, and EPU. I have significantly reduced my total cash position during the past four months in order to increase my holdings of the above assets.