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2011 certainly was a difficult year for gold bugs.
Gold barely held onto its gains for the year while Silver went parabolic and
eventually fell to negative on the year. Mining stocks? Don’t ask. The
large caps (gdx) are currently down 17% on the year
while the mid-tiers (gdxj) are down 41% and the
explorers (gldx) are down 44%. In our last
commentary we discussed the equities with respect to investing and
speculating. By now, you should know that most mining stocks are speculations
and do not perform consistently, even in a raging bull market.
The often hyped “juniors” have been a
disaster unless you’ve been extremely patient and selective while
getting lucky with your timing. The juniors are an excellent tool for
speculation and only speculation. They cannot be bought and held. They have
to be timed nearly perfectly. Ironically, many advisors who are “doom
and gloom” types favor the juniors. Some of these types are super
bearish on the USA. They’ve expatriated, waiting for the collapse of
the USA while holding juniors. This foolhardy strategy has helped them sell
newsletters but hasn’t been too profitable.
Below we show a chart of the CDNX next to the
S&P 500. They appear nearly identical which means that the juniors do
well when the overall market does well and they perform poorly when the
overall market is falling.
 
We should have learned a few things by now. If you
are really bearish then you want to concentrate your investments in Bonds,
cash and Gold and completely avoid all speculative mining stocks. If you are
more optimistic then look to buy quality companies and speculate in some of
the juniors. We should also have learned that the dollar is not going to
collapse and the US is not going collapse or go into hyperinflation. Anytime
you hear this talk, get as far away as you can. This talk is romantic,
enticing and can be powerful but it is never profitable. It is entertainment
and fantasy. We are seeing what will be a slow motion transformation of the
monetary and financial system.
Pertaining to Gold we hear nonsense that you should
avoid the equities because they are rigged or shorted by hedge funds. We recently explained why the shares are under-performing. How
timely is this frustration from the gold bugs? Last we heard it, it was late
2008 and a tremendous buying opportunity.
All this being said, now is the time to be
optimistic and aggressive on the mining stocks and even the juniors. Various
sentiment indicators, if not comparable to 2008 lows are nearing 2002 lows.
The coming bottom in the sector will certainly be a major bottom.
Technically, the large cap gold stocks have broken down but interestingly,
this breakdown occurred with a bullish percent index (% of stocks on a
P&F buy signal) of 10%. Back in 2008, the equities began to breakdown
with a BPI of 30%. The October decline began with a BPI near 70%. By the time
the BPI fell to 10%, the sector had bottomed.
Traders, investors and speculators need to be a bit
more patient as the market bottoms. It could be a few days or perhaps a few
weeks but it should be clear one month from now. Most stocks are likely to
have big rallies. How do we find the ones which will outperform? Those
trading near highs with strong bases are likely to have substantial breakouts
provided the fundamentals are there. Many juniors have been beaten badly but
the ones with substantial cash positions, tight share structures and
promising prospects have a chance to explode off their bottoms. We were
cautious and neutral for most of 2011 but we are bullish on 2012. If you’d like professional guidance in navigating what lies ahead, while managing risk, consider learning more about our premium service.
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