Tuesday, May 20, 2014

"When a person with money meets a person with experience, the person with the experience winds up with the money and the person with the money winds up with the experience." --Harvey MacKay

MINING SHARES ARE AMONG THE BEST-PERFORMING SECTORS OF 2014, AND REMAIN AMONG THE MOST COMPELLING BARGAINS (May 20, 2014): Earlier in 2014, I was a huge fan of purchasing emerging-market equity funds which in many cases had slumped toward their lowest levels in five years. During the past few months, most of these funds have rebounded, even those which had been the least popular including India (SCIF), Indonesia (IDX), Brazil (EWZ), Colombia (GXG), and finally Russia (RSX). I wouldn't dream of selling these until they return to their levels from 2011, but they are no longer sufficiently compelling to buy. However, there does remain an important sector which has begun rebounding from similar five-year bottoms reached in June through December 2013, but which remains significantly below historic averages and continues to receive mostly gloomy media coverage. This equity group is mining shares of all kinds--precious metals, coal, uranium, rare-earth metals, base metals, and related assets.

Out of all of the above, the best current bargains are probably gold and silver mining shares. These had been the top-performing subsector from December 23, 2013 through March 14, 2014 when these assets surged; for example, GDXJ gained 59.7%. From March 14 through April 21, these surrendered much of their increase, with GDXJ slumping 26.6%. During the past month, these have gone net sideways while encouraging a fresh bout of negative media commentary and renewed calls for gold to plummet to one thousand U.S. dollars per troy ounce. Whenever any asset has transitioned from a severe bear market to a primary bull market, and is accompanied by continued negative commentary and investor indifference, then it is almost always approaching its next important uptrend. This has provided an opportunity to add to positions in GDX, GDXJ, GLDX, SIL, SILJ, and similar funds of gold and silver mining shares.

KOL is a fund of coal-mining shares which had bottomed in the early summer of 2013 and completed an important higher low on February 3, 2014. Since then, it has formed several higher lows, defying continued insistence by analysts that coal is going to be magically replaced by other energy sources. The reality is that the global usage of coal sets new records each year, and 2014 is not going to be an exception. Historically, coal mining shares are especially volatile and have experienced dramatic swings in both directions. If they have switched from a bear market to a bull market, which is highly probable, then they are likely to accelerate their uptrend later in 2014 which should continue into the first half of 2015. Energy producers in general remain out of favor, with coal mining being among the most notable.

Another unpopular energy subsector is uranium mining. A year ago, a multi-decade program to convert Soviet nuclear missiles to energy usage was scheduled to terminate, which would drastically curtail the worldwide supply of uranium. Many speculators bought uranium a few years ago in anticipation of this event. When the program ended and uranium didn't suddenly soar, disappointed holders sold nearly simultaneously which caused the price of uranium to plummet. Looking at a chart of URA, it appears that this fund is completing its three-year bear market and is set for a significant rebound. A brief rally in late winter fizzled out, thereby discouraging nearly all short-term speculators from getting back in and leaving the field wide open for those who are willing to buy low and to wait for perhaps a year before selling high. If URA returns to its high of February 2012, which is nowhere near its even more elevated pre-Fukushima peak of 2011, then this fund will considerably more than double from its current price.

REMX is a fund of rare-earth metals which had become trendy three years ago when it was feared that China would reduce its export of these metals which are required to manufacture many high-tech devices used by nearly everyone around the world. As with many other mining and emerging-market assets, this fund peaked in April 2011 and thereafter suffered a severe bear market before attempting to bottom during the past half year. With almost all previous holders having been flushed out of their long positions, the stage is set for a rebound which, like URA and many other funds listed above, will result in its current price more than doubling if it approaches its high from early February 2012.

Base metals have been trendier than many other commodities in recent months, so the shares of their producers and related funds including COPX aren't as depressed as most of the other assets listed in the previous paragraphs. I have therefore stopped buying these after having accumulated them during the first half of March 2014. I wouldn't dream of selling these until we experience heavy insider selling, eager amateur participation, cable TV excitement over these shares, and all of the usual signs of a topping pattern.

It is surprising how many investors are continuing to pile into assets which are at or near all-time highs and are far more likely to decline than to continue to rally, because they are falsely projecting their outperformance since early 2009 into the indefinite future. At the same time, nearly all investors are ignoring the opportunity to accumulate securities which reached or approached five-year lows during the past year and have just begun to rebound. The underperformance of the Russell 2000 relative to the S&P 500 is seen by most investors as an excuse to sell the former while buying the latter, just as too many investors foolishly did in 2007 and previously in 1999-2000 when a similar divergence occurred. Instead, it makes sense to accumulate the most undervalued and least desired equities into all pullbacks, because they are likely to be among the biggest winners of the upcoming year. General U.S. equities have already entered a bear market which is being dangerously underestimated by almost everyone.

Disclosure: In August-September 2013, and again during the first four months of 2014, I was aggressively buying the shares of emerging-market country funds whenever they appeared to be most undervalued. Since June 2013, I have added periodically to funds of mining shares and related assets especially following their most extended pullbacks. Starting in December 2013 I have been buying HDGE whenever it has traded below 13 dollars per share with the idea of selling it in 2016-2017 as we are completing the next U.S. equity bear-market bottoming pattern; HDGE is an actively managed fund which sells short various U.S. equities. From my largest to my smallest position, I currently own GDXJ, KOL, XME, GDX, SCIF, SIL, COPX, REMX, EWZ, RSX, IDX, GXG, HDGE, ECH, GLDX, URA, VGPMX, BGEIX, VNM, ZJG (Toronto), PLTM, EPU, TUR, SLX, SOIL, EPHE, and THD. I have reduced my total cash position since June 2013 to approximately one sixth of my total liquid net worth in order to increase my holdings in the above assets. I sold almost 90% of my SLX near 49 dollars per share in November-December 2013 because steel insiders were doing likewise. I plan to buy more HDGE each time it drops below 13 dollars per share, because I expect the S&P 500 to eventually lose more than half of its current value--with most of that decline beginning during the second quarter of 2015 and extending into 2016 or 2017. The Russell 2000 Index failed to achieve a new all-time top in April-May 2014 while the S&P 500 did so several times, in a classic negative divergence which previously occurred during October 2007. Those who have "forgotten" the lessons of the 2007-2009 bear market are doomed to repeat their mistakes.