“The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger--but recognize the opportunity.”
John F. Kennedy
They tell me that there is a “crisis” brewing in the gold stock industry, but before throwing up our hands and crying “uncle”, let’s ponder Kennedy’s quote. Dangerandopportunityside by side, but how to capitalize on it?
We need to understand the crucial elements at play. A simple visual will go a long way in helping to explain the current “crisis” happening in the gold stock industry.
Imagine a boat bobbing happily on the water. The water level undulates in tune with the natural ups and downs of a large body of water; there are rogue waves from time to time which toss the boat about, but for the most part, the water’s movement in no way threatens to capsize our boat. Now imagine our boat taking on water at a tremendous rate, submerging and sinking well below the surface, but NOT on account of a storm or holes in the boat, or any other obvious reason for that matter!
In the junior gold company equities market, our boat represents the companies’ share prices. Like a ship in water, these companies are rocked by fluctuations in the price of gold. The price of gold goes up and down, but not nearly to the extent that would capsize and submerge gold share prices to the degree we witness in the current marketplace. So, how does this make sense??? The short answer is, it doesn’t.
Consider the GDXJ Index. This index is an equity index of junior gold mining companies that are already producing gold; there are, in fact, over 70 junior precious metals producers included in this sampling. Over the past two years, the GDXJ Index has fallen by a startling 70% while the price of gold, although volatile and moving both up and down, has not sunken to new lows, but in fact has continued totrend upwards since the crash of 2008. Wouldn’t it make sense that our boat continue to at least float? Oh! But inflation and the costs of production have risen since 2008, and that is why we see share prices fall, I hear the naysayers cry. This is perhaps true to some degree. However, these marginal increases could not possibly be totally responsible for the complete havoc and carnage we have witnessed to date on the price of gold stocks. Ireiterate, the marginal rises in inflation and cost of production over the past 2 years, is in no way equivalent or justifiable to a 70% dip in GDXJ--it just does not make economic sense.
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With gold, silver and Uranium stocks being out of favor one must decide if this is a problem or an opportunity. We have steadfastly refused to buy gold and silver mining stocks for the last two years and as evidenced by the HUI we feel that our decision to hold back has been vindicated. The damage done to the mining sector may not be over yet but this demise is starting to offer up some exciting opportunities in my view.
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