One of my subscribers sent an article to me that had been linked on Goldseek.com.
The author laid out a case based on the recent events surrounding GDXJ
and JNUG that the junior mining sector would likely “implode.”
I get suspicious about an article when the author repeatedly, with
much bravado, makes the claim the he is laying out facts and challenges
anyone to present challenges to those “facts.” Typically that style of
writing belies a conspicuous absence of facts.
The author bases his premise that the GDXJ rebalancing and the
related suspension of JNUG shares would strangle money available to
finance junior mining shares. Nothing could be further from the truth.
To begin with, investment capital does not flow into the juniors via
GDXJ or JNUG. GDXJ is a quasi-derivative security that buys the stocks
it holds on the secondary market. It is unequivocally not a capital
raising mechanism for companies. Money flows into juniors directly
from investors who buy shares issued by the companies. I’ve chatted
with several junior mining stock CEO’s – true juniors – and they have
all said one thing in common: there is a lot of money being made
available to the junior mining companies by both large institutional
investors and strategic investors. The rebalancing of GDXJ and the
share suspension of JNUG will have zero effect on this.
Too be sure, the author presents some interesting theories about what
is happening with GDXJ and JNUG using some charts he presents. But
charts only show facts about the directional moves made by stocks. They
don’t explain why those moves occurred. The author’s views on why the
moves occurred are theories, not facts. To compound the problem, the
author uses a 5-day trading period with which to draw conclusions.
The short term divergences shown in the chart comparing JNUG to the
various leveraged miner ETFs is most likely explained by the fact that
some hedge funds/traders got ahold of the GDXJ and JNUG news and decided
to front-run the market. Any seasoned market veteran knows that you
can’t use just 5 or 6 days of chart data to make inferences about what
may or may not be going on behind the scenes with capital flows and
trade strategies. The ONLY conclusion we can draw from that chart is
that JNUG underperformed the other ETFs over a 5 day period. So what?
There could be any number of reasons why this occurred. The
front-running explanation is the most likely.
Finally, the author noted that the mining shares suspiciously
diverged negatively from the price gains in gold and silver during a few
days in February. He claimed it was something he had never witnessed
in 15 years of “pouring over gold, silver and mining charts on a near
daily basis.”
Well, that’s the problem. The author has his head buried in graphs.
He can’t see the forest through the trees. There’s been several
periods of time when the direction of the mining shares and gold/silver
diverge over the past 16 years since the bull market in the precious
metals sector began. I have had discussions about this quite
frequently with my colleagues over the past 16 years. There’s any
number of explanations for this occurrence. Furthermore, this trading
anomaly was occurring
before the existence of any of the mining stock ETFs.
Alternatively, I presented an analysis of JNUG and explained why the
suspension of share issuance might actually be a bullish signal for the
junior miners in the most recent issue of the
Mining Stock Journal.
Furthermore, the juniors remain exceedingly undervalued relative to
the entire sector and big institutional investors and large-cap mining
companies are validating this with ongoing large capital investments
into these companies. Of course, this was the case when the bull market
began in 2000/2001 as well – before mining stock ETFs were even in the
planning stages…
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Dave Kranzler spent many years working in various Wall Street jobs. After business school, he traded junk bonds for a large bank. He has an MBA from the University of Chicago, with a concentration in accounting and finance, and graduated Oberlin College with majors in Economics and English. Dave has nearly thirty years of experience in studying, researching, analyzing and investing in the financial markets. Currently he co-manages a precious metals and mining stock investment fund in Denver and publishes the Mining Stock and Short Seller Journals. Contact Dave at dkranzler62@gmail.com.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
