What should you do if a fund of junior gold mining shares like GDXJ had bottomed at 22.34 and is now moderately higher? Of course you could decide to buy it even though it has recently climbed sharply, but a much better idea is to observe the historic pattern in which gold and silver mining shares tend to rally from multi-year lows prior to similar rallies for other commodity producers and emerging-market equities. Funds including FCG (natural gas producers), COPX (copper mining shares), and GXG (Colombian equities), among dozens of others, slumped to five- and six-year bottoms on December 1, 2014. Knowing that precious metals producers are a leading indicator, it is thereby safe to purchase all related assets which are directly or indirectly connected with commodity production. In this way, you are continually accumulating the best bargains which are available and which no one wants to buy until they have rebounded, instead of chasing after the hottest securities which have already been progressively recovering. Eventually, the lagging assets you purchase will enjoy similar rallies.
What reason is there for commodities to rally, given the OPEC meeting and the Switzerland gold referendum? The answer is that meetings and referendums don't determine the future prices of assets, which fluctuate almost entirely based upon economic considerations. Whenever there is a political motivation for buying or selling, such as a street protest or a change in government--or in the case of Brazil, the lack of a change in government--it is almost always profitable to trade in the opposite direction of the media consensus. If you hear even on non-financial cable TV stations why the price of oil will drop because of the OPEC meeting, or why the price of gold will slump because of a Sunday morning vote in Switzerland, then you can rest assured that the behavior of the U.S. dollar and the global economy is ten thousand times more important. The value of the greenback vs. the aussie or loonie isn't going to make headline news, because it's not very exciting and it's challenging for a journalist to create an entertaining and simplistic story line to attract viewers. However, these "boring" facts will be the key elements in determining whether the shares of commodity producers and emerging-market equities will rise or fall during the upcoming year.
If there was anyone who was long crude oil, gold, silver, the shares of commodity producers, Brazilian or Russian equities, or the Australian and Canadian dollars, and emotionally wanted to sell out of disappointment, then the OPEC meeting and the Swiss gold referendum--along with the most recent Fed meeting, the U.S. Congressional elections, and a dozen other newsworthy events, not to mention the handy excuse of tax-loss selling at this time of year--gave these folks plenty of excuses to finally log into their accounts and close out their positions. The remaining owners of these assets are primarily highly committed, knowledgeable, value investors who will not easily be dissuaded into selling by media hype or anything else, thereby setting the stage for a dramatic extended rally. A fund like FCG, if it merely touches its June 23, 2014 intraday high of 24.12, will have more than doubled from today's intraday low of 11.89. Many funds of commodity producers will triple or more if they revisit their respective peaks from past years including 2013, 2012, and especially 2011. While nearly all analysts are concerned about how much lower these assets will go, a far more interesting and pertinent question is how high they can climb after they have reversed direction. At the end of any bear market, nearly all investors become irrationally obsessed with the potential for additional losses and forget that if something has lost 5/6 of its value then it will triple in price if it regains half of its previous top.
Pay attention to fund flows which are ignored by almost all investors. At the same time that there have been record inflows into many U.S. equity funds in recent months, there have been all-time outflows from most assets connected with commodity production and emerging markets. Mining and energy shares in particular have suffered dramatic declines, with the percentage of the S&P 500's total market capitalization devoted to energy close to an all-time low. Relative to almost all other equity groups, the total market capitalization of mining shares is at a multi-decade bottom. In recent months, insiders have been substantial buyers of the shares of commodity producers, while the traders' commitments are near multi-decade bullish extremes of commercial (insider) accumulation. Regarding currencies, commodity pools and other speculative entities have been making all-time record bets on a rising greenback. The media are clearly on the side of these speculators, believing almost unanimously that the U.S. dollar will continue to rise indefinitely along with U.S. equities, U.S. corporate bonds, U.S. real estate and just about everything else connected with the United States.
If the overnight action in gold and silver proved anything, as did similar behavior on November 5, 2014, it is that whenever there is a unanimous consensus that anything will happen in the financial markets then it inevitably proves to be the opposite of what actually occurs. If everyone is convinced that gold will plummet to one thousand dollars per troy ounce, then it will instead surge higher. If everyone is certain that the U.S. dollar is the cleanest dirty shirt in the laundry and will continue to climb versus all other currencies, then the greenback is likely instead to decline roughly through the end of 2015--and perhaps beyond if investors aren't sufficiently bearish toward the U.S. dollar a year from now. If everyone knows that U.S. equities are safer and more reliable than stocks anywhere else in the world, then U.S. equities will suffer a period of prolonged underperformance and almost certainly will decline by more than half as they have done in past decades whenever they have been this dramatically overvalued. It's worth noting that investors made their heaviest outflows from funds connected with the S&P 500 and other U.S. benchmark indices when the S&P was close to its March 6, 2009 nadir of 666.79, and now that it has more than tripled we have enjoyed huge inflows into the same funds. Investors love to buy high and to sell low, because that enables them to do exactly what the media are brainwashing them to do.
Summary: Today's rally for gold and silver mining shares is pointing the way higher for the shares of other commodity producers and emerging-market equities which have continued to retreat toward five- and six-year bottoms. Buy them before everyone else realizes what is going to happen in 2015.
Disclosure: In August-September 2013, and again throughout 2014, I have been 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, and more recently whenever it has retreated below 12, 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, HDGE, GDX, SIL, COPX, REMX, EWZ, RSX, IDX, GXG, ECH, GLDX, URA, FCG, VGPMX, BGEIX, VNM, ZJG (Toronto), PLTM, EPU, TUR, NGE, SILJ, SOIL, EPHE, and THD. In the late spring of 2014, I sold all of my SCIF which had briefly become my fourth-largest holding, because euphoria over the Indian election was irrationally overdone and this fund had more than doubled; since then, SCIF has been one of the biggest losers of all emerging-market funds. I have reduced my total cash position since June 2013 to approximately 6% of my total liquid net worth in order to increase my holdings in the above assets. I have now sold all of my SLX by acting whenever steel insiders were doing likewise. I expect the S&P 500 to eventually lose about two thirds of its 2014 peak value--with most of that decline occurring in 2016 and perhaps continuing into 2017. The Russell 2000 Index barely achieved a new all-time top on July 1, 2014 compared with its early March 2014 highs and made a lower high on November 28, 2014, while the S&P 500 set a new all-time high on numerous occasions during the same nine-month period. The Russell Micro-cap Index has been even weaker since it completed a historic top on March 6, 2014. This marked a classic negative divergence which previously occurred in years including 1928-1929, 1972-1973, and 2007. Those who have "forgotten" or never learned the lessons of past bear markets are doomed to repeat their mistakes.
