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Thursday
Jul142016

Junior Gold and Silver Mining Funds or Individual Gold and Silver Mining Stocks

Background

We will start with a quote that is sometimes attributed to Sir Winston Churchill, the British Prime Minister, who led Britain during the Second World War.

 “If you’re going through hell; keep going

With the enemy at the gate Sir Winston Churchill didn’t have much choice other than to stick it out. For gold bugs such as me the bear market in gold and silver was a really difficult time, but these are phases that we just have to get through. However for gold and silver bugs we did have a choice and as dull as it seemed at the time of the bear market we chose to keep the lion’s share of our funds in US Dollars which outperformed gold.

 

Chart courtesy of StockCharts.com

The chart of above compares gold and the USD and we can clearly see that that from 2013 until today that gold has underperformed the USD with gold down 20% and the USD up 20%. This has of course all changed this year when gold took off from $1075/oz to $1343/oz gaining 20% as the USD dropped a tad from 99 on the USD Index to 96 registering a loss of 3%.

Funds or Individual stocks

The question now for many investors is whether or not to utilize the funds or hand select a list of individual companies that they think will do well in this unfolding bull market. In order to make this comparison we will take a quick look at the Market Vectors Junior Gold Miners ETF (NYSEARCA: GDXJ). If we now look at its performance on a YTD basis we can see that this fund is up 160%, which is terrific. Some stocks have performed very well indeed and others have not been able to gain any real traction.

This fund’s top 3 holdings are:

B2Gold Corp (NYSEMKT: BTG) Mkt cap US$2.73B - 5.66%

Alamos Gold Inc. (USA) (NYSE:AGI) Mkt cap    US$2.60B - 4.95%

First Majestic Silver Corp (NYSE:AG) Mkt cap US$2.50B - 4.89%

Please note that these 3 stocks are all valued at US$2B plus so they are hardly juniors.

B2gold is up 203% Year-To-Date

Alamos Gold is up 202% Year-To-Date

First Majestic Silver is up 421% Year-To-Date

Performing not so well are:

China Gold International Resources Corp Ltd (TSE:CGG) up 23% Year-To-Date

Primero Mining Corp (NYSE:PPP) up 11% Year-To-Date

One of the reasons to invest in such a fund is that the loses accrued by some stocks are minimized by those stocks that make gains. On the other hand the gains that are made are also diluted by those stocks that don’t perform and so the result is a sort of average for the precious metals mining sector. This YTD performance of 160% is comparable to the Gold Bugs Index (HUI) which is up from 100 to 270. GDXJ also has huge liquidity and can trade 20 million shares in a day. This amount of trading allows the investor easier entry and exit points oppose to a small junior miner where a large number of buyers all moving at the same time will drive the stock price up. Funds such as these carry small fees but nevertheless you do have pay them for their expertise.

Stock selection on an individual basis requires a fair amount of work and once the purchase has been made, continuous monitoring is required. Many investors don’t have the time, energy or the inclination to conduct their own due diligence so selecting individual stocks as a means of investing appears arduous to them.

It should be noted that when an investor wishes to exit a position in a small junior miner the possible lack of buyers at the time may mean that the sell orders can’t get filled and so the price declines rather quickly.

Prediction

This is a snippet from our latest update to our subscribers, “I know I am putting my neck well and truly on the line with the following prediction but I believe it will happen:

Some of the precious metals mining companies that are available today and can be purchased for $2, $3, $4 – they will go up by the same amount in one trading session when this bull market starts to really spark. That’s right a $3.00 stock will increase by multiples of its current price, a 7 fold move would see this stock trading at $21.00, then we get a spike of say 15% in one day for an increase of $3.15. We will re-visit this prediction in a few years from now and see if we were close or not.”

Conclusion

The PM mining sector has burst into life in dramatic fashion this year and from a technical analysis standpoint looks to have run too far, too fast, suggesting that a correction is on the cards. However, the fundamental factors including the massive amount of money printing that is taking place, faltering economies, a dismal performance in the banking sector, the increased demand from China and India is exerting pressure on the physical supply of both gold and silver. This situation will intensify over the next few years driving the precious metals sector higher despite their current overbought position. That’s not to say that we won’t have any pullbacks, we will and they will be gut wrenching when they arrive, however, we expect them to be short lived.

Patience is the order of the day as we live in the fast lane with dramatic changes, such as the UK referendum along with other referendums to follow as the European Union eventually implodes. We also have presidential election in the US which no doubt will bring with it some changes that we haven’t anticipated yet.  There is also the single most important factor affecting the economy, currencies and the precious metals market that can be summed in two words: ‘Janet Yellen. Without doubt a close eye must be kept on monetary policy. The possibility of a rate hike this year has almost disappeared and any hint of more QE will supercharge gold prices.

Hopefully you have used this bear market to analyze and research the stocks that you would like to own and have formulated a short list that you can manage and keep on top of once you have made your acquisitions. Our watch list is huge however we have identified around 20 stocks or so for purchase, some we have acquired and some are yet to be purchased. This bull market has a long, long way to go, so don’t worry if you have missed the start, as with all bull markets there will be dips and numerous opportunities to trade in what we believe is going to be a very interesting and exciting period for precious metals fans across the globe.

Finally, go gently and don’t fall in love with just one particular stock, this is not a game for your heart; it is a game that will be won by your head.

Got a comment, then please fire it in whether you agree with us or not, as the more diverse commentary we get the more balance we will have in this debate and hopefully our trading decisions will be better informed and more profitable.

For disclosure purposes I do own First Majestic Silver Corporation (AG) but none of the others mentioned above.

Go gently.

If you would like to know which stocks we are buying and selling please join us atStock Trader our premium investment service.

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