Precious Metals: Staying the Course (January 19, 2016)

by FI Fighter on January 19, 2016

in Precious Metals, Precious Metals Updates

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When it comes to investing, as the saying goes, “The markets can stay irrational longer than you can stay solvent.” As it pertains to gold and gold mining stocks, this quote is resonating more truly with each passing day.

I started investing in gold stocks in 2015, and I’ve got to say, I’ve never seen things as bad as they are right now!  Since the start of the new year, many stocks have been caught in a severe negative downtrend, and it just seems like new record lows are being eclipsed by the minute.

As a speculator (who believes they are doing the right thing by seeking out deep value), this can at times be most frustrating and disheartening…

Like I’ve mentioned in previous posts, I have many friends who are also investing in this space, and some of them are starting to get extremely emotional…

Gold mining stocks are not for everyone! They are beyond volatile, so if you can’t stomach the pain, you shouldn’t be participating in this sector… For newbies, I’ve always believed that it’s more prudent to start off by buying just a small tranche, as opposed to rushing on in and trying to buy up everything all at once… You’ve really got to first ride out a few rallies and sell-offs to see if you’ve got what it takes to stay the course…

It ain’t always that easy…

Otherwise, you’ll end up like some of my friends who are heavily distraught at the moment, and lamenting their decision to participate in this trade…

Such is life.

If market timing was easy, we’d have all been retired many years ago, right?

Anyway, I’m just gonna keep on doing what I’ve been doing — Buying more on the dips, and looking for more opportunities.

I’m very much hard-headed that way…

With that said, I made the following purchases to close out last week:

  • Purchased 4,500 shares of B2Gold (BTG) @ $0.717/share
  • Purchased 15,000 shares of Teranga Gold (TGZ.TO) @ between C$0.445/share and C$0.43/share

You’re not going to be able to convince me that these stocks aren’t worth buying… If I thought many of these companies were cheap before, well, they are now selling for 30% less than what I originally purchased them for…

All across the board…

If ONLY one of my positions was taking it on the chin, I would have a lot more reservations with dollar cost averaging (DCA) down… But when the entire portfolio is off BIG, then that just tells me that the entire sector is in (more) liquidation…

So, no worries here… Despite the fact that my portfolio is currently down over 20% and $55,000… 🙂

Seriously, with the way gold mining stocks have been selling off, you would think that the spot price of gold was cratering through the floor…

Gold is actually holding up quite nicely in USD:

Gold priced in USD:

Screen Shot 2016-01-19 at 8.27.37 AM

It’s doing even better in other currencies…

Gold priced in CAD:

Screen Shot 2016-01-19 at 8.25.37 AM

Gold priced in AUD:

Screen Shot 2016-01-19 at 8.25.50 AM

Gold priced in ZAR:

Screen Shot 2016-01-19 at 8.26.01 AM

As you can see from the charts above, gold is in a strong uptrend right now in most currencies outside of the USD (it’s actually even setting record highs in countries such as South Africa)… The story right now (and for the last few months) has been all about the almighty dollar!

But that’s obviously a story that can’t go on forever (unless you believe in Janet Yellen and the Fed)…

For example, in Nunavut, Canada:

Screen Shot 2016-01-19 at 8.37.46 AM

I can’t wait to see the latest earnings report for our largest multinational companies!

Yes, I do believe the USD still has legs to run (the world flocks to USD when they get scared), which is why I hedge in both cash and gold… Nevertheless, I still feel like gold (and some of the first world currencies, like CAD) are the much better value right now, which is why I have no problem converting USD into CAD to purchase gold shares.

Two birds with one stone…

As I mentioned in the previous post, I do strongly feel that DCA into stories that are coming off of relative strength (AMZN, FB, NFLX, etc.) is a risky move in a deflationary environment… On the other hand, I have no qualms with DCA into a sector (gold mining stocks) that is already in severe liquidation…

Exhibit A:

TGZ

Exhibit B:

NFLX

Which stock would you buy?!?

Yes, things can get worse, and they probably will… But I feel like a kid in the candy store right now, so I really don’t care…

At some point, valuations will matter to the markets again. They always do. Today, gold stocks provide deep value in spades… How about the FANG (Facebook, Amazon, Netflix, Google) stocks?

Not so much…

But when it comes to excess frothiness, the dot-com boom was not an exception! Subprime was not any different! And Zero Interest Rate Policy (ZIRP) will prove that history just keeps on repeating itself, over and over and over and over again and again…

I’m just going to do my best to stick to the best mid-tier producers with: strong balance sheets, minimal debt, great assets (operating outside of the US), and low cash costs/AISC…

Besides, with declining fuel costs, expenses are actually going down for miners (a much welcomed relief)… And the low spot price in USD doesn’t actually hurt too badly if you’re buying companies who operate gold mines elsewhere, such as in Australia or Canada (the labor, for instance, is paid in the local currency). As I already mentioned, those other currencies (CAD, AUD) are currently being taken out to the woodshed…

So, at first glance, a low spot price in USD might seem scary for gold miners (commodities such as gold are sold/traded in USD in the marketplace), but it’s all relative… As long as every other currency out there is also losing the fight badly against the USD (which they are), that low spot price gets offset by lower operating costs.

Anyway, as usual, I think it’s important for US investors to look at things outside of just our own borders… Americans hate don’t understand gold with a passion, yes, but look elsewhere and the populations of basically every other country on this planet sure wish they had some (a lot of!) physical gold right now…

One more chart for you:

Gold priced in RUB:

Screen Shot 2016-01-19 at 8.57.02 AM

No, I can’t claim to know the first thing about Russia, but WOW!!

Anyway, in a Currency War, fiat currencies get devalued and debased… over and over again.

 

But that’ll never happen in America, right?

 

That’s for you to decide… I’ve obviously made my bets in regards to where I think things are headed in the future…

 

Happy Hunting!

{ 16 comments… read them below or add one }

1 mikeNo Gravatar January 19, 2016 at 9:30 am
2 FI FighterNo Gravatar January 19, 2016 at 9:36 am

Mike,

I said hedge with both cash and gold… And I’ve got 8 rental properties…

I know I’m crazy, but crazy has limits…

Take care!

Reply

3 RandyNo Gravatar January 19, 2016 at 12:53 pm

Both feet would be if you sold your rental properties and jumped in. If you are young and can afford the gamble now is the time. I agree 100% with you that this sector is beat down and will eventually pay off. It is a matter of being patient and non-emotional. I am there with you my friend.

Reply

4 FI FighterNo Gravatar January 19, 2016 at 1:14 pm

Randy,

Thanks for the support! This sell-off seems fishy to me… almost like a foreshadowing of more things to come… Something is definitely not right…

Gold/silver did NOT sell off today, but all the miners did… almost like a mass liquidation type of event.

What’s going on behind the scenes, I wonder… Need to investigate more.

All the best!

Reply

5 SriniNo Gravatar January 19, 2016 at 5:22 pm

Jay,
I am sensing a liquidity event for some one. I don’t know for sure but I am at awe looking at closing as I woke up from bed this morning. Few counters that are historically thinly traded had a huge spike down in price with huge volume.

I feel the powder should be kept dry to let it completely play through before deploying fresh cash in spite of fire sale going on. But it’s insane.

Reply

6 FI FighterNo Gravatar January 19, 2016 at 6:32 pm

Srini,

Great advice on holding dry powder… I jumped the gun too early on a few positions such as B2Gold (BTG), and it still doesn’t look like the selling is done…

Sometimes it’s really tough to fight instinct and the temptation to buy more shares of your favorite stocks at such favorable prices…

But like you said, let’s wait it out and see what the big money does… Today (and these past 2 weeks really), someone (or someones) wanted out real bad…

Cheers!

Reply

7 FI FighterNo Gravatar January 19, 2016 at 6:42 pm

I found this article today…

Please note: This starts heading down the rabbit hole and I am in no way insinuating any of the author’s thoughts are true and fact…

I only post it b/c it relates to the mining shares sell off today:

http://investmentresearchdynamics.com/tuesday-morning-massacre-in-the-large-cap-miners/

PLEASE DO YOUR OWN DUE DILIGENCE BEFORE FORMING ANY DEFINITIVE OPINIONS!

“Back to the Dallas Fed issue, does this sound familiar? Anyone happen to learn anything from “The Big Short” about the fraudulent behavior of the big banks when their fraudulent business activity hits the wall? One well-read analyst dismissed this latest round of fraud by attributing it to the change in mark to market accounting rules passed in 2009. But these rules were meant to enable the big banks to avoid reporting asset mark-downs for GAAP purposes, enabling them to mark-up bad assets. This further enabled these banks to misrepresent their earnings per share in quarterly earning reports. But that analyst is whistling past the graveyard on this issue. This is much more insidious and fraudulent than changing the GAAP accounting rules. This is about telling banks to let bankrupt companies pretend to be solvent, just like we saw in The Big Short with CDO’s and CLO’s.

This latest move by the Fed is an attempt to play Atlas and hold up the world of banking on its shoulders. It’s about enabling these banks to avoid taking big hits to their reserve capital. This lets the banks carry on as if nothing is wrong when they should be selling assets hand over fist and raising even more capital to use as reserves against collapsing energy assets. The canary has died and the Dallas Fed is going to try and carry the canary out of the mine before anyone sees the corpse.

Now does it sound familiar? This is exactly what happened in 2008 in the mortgage market. Only this time around it will be worse because this dynamic will encompass most of the biggest lending sectors of the financial system: energy, auto loans and student loans. Don’t worry, mortgages won’t be left out. The pool of homebuyers sitting on 0-3% down payment mortgages has bubbled up. I predict that within the next twelve months a large portion of the subprime mortgages disguised as FNM/FRE/FHA conventional loans will be come quite problematic for the banks.

How does this relate to the Tuesday morning massacre in the large cap miners? Whenever something really bad is about to hit the system, one of the first places it manifests is with an unexplainable raid on the mining stocks. I thumbed through the news announcements of every single component of the HUI index and could not find any news reports that would have triggered a 6% hit on the HUI. Some of the biggest stocks, like BVN, Kinross and Newmont are down 7-10%. Unexplainably down.

This could lead to a big attack on gold/silver, so brace yourself. It won’t last and anyone who sells into it out of fear will regret doing so in 3-6 months.”

8 SriniNo Gravatar January 19, 2016 at 10:31 pm

Thanks for the article related to yesterday’s mining crash.

I won’t be harsh on myself if I were you. In hindsight one could have performed better. But when there is huge value it’s difficult to let it pass. We don’t have a crystal ball to predict. We can neither catch the bottom or the top. All we could do is accept the present moment and continue to follow ones instinct. But don’t get carried away with just one company, how much ever attractive it may sound to be.

Jan month usually is the strongest month for PM’s. I bought in good qty’s in some of my favorite ones last week of Dec/ 1st week of Jan to see those positions go down 10% to 15%. Silver equities across the board are smashed left right and center. My short term thesis went wrong big time and market chopped off my head and handed it to me on a platter.

But the market is also telling me when the regular seasonality is broken and capitulation is around the corner and with that bear market typically tends to end. So my hunch is we will bottom out in next 3-5 months. Do I have a crystal ball, “No”. Will I be proved wrong, sure but I doubt it.

Historically gold and silver miners bottom prior to the commodity price. These shorting raids could very well tell us what is in store for the commodity price. Who knows what will be the lowest ticker price. Some of them are relatively holding together (e.g. LSG, Klondex etc ) but at sub 1000$ price, even those holding today may start to fall. And at that time options will be many. Suggest keeping the focus sharp and buy into the best of the best and be ready to collect x10 or x20 or even x30to x50 multipliers by 2020.

Yes the risk is extremely high in this sector and so is the reward. This is the time to dream big and the odds are too good to resist.

Glad that “you are feeling like kid in candy store”, so am I.

cheers

9 JonNo Gravatar January 19, 2016 at 3:01 pm

Good stuff. I’d like to hear your opinion on the Chinese buying gold and the future shanghai gold exchange fix if possible!

Reply

10 FI FighterNo Gravatar January 19, 2016 at 6:27 pm

Jon,

When it comes to China and buying gold, that’s a pretty opaque scene and a lot of us on the outside trying to look in are just speculating… With that said, I’m in no way knowledgeable enough to really comment…

One popular theory is this stealth gold accumulation is to allow China to “hedge” its bets since they own so much US treasury debt.

Though it is pretty obvious that China wants to establish a more international market for the yuan, with the recent inclusion into the SDR basket a step in the right direction… I would try and follow trade agreements out in the East between China, Russia, India, etc… Jim Rickards talks a lot about the impending “fall of the petrodollar”, but that may be a few years (or many) out…

Last I looked, Shanghai withdrawals were at record highs (conclusion of 2015)… And with the uncertainty in the Chinese stock markets, devaluation of the yuan, I’m guessing many locals will soon flee to gold/USD as a safe haven.

It’s gonna be an interesting 2016, that’s for sure…

Take care!

Reply

11 JonNo Gravatar January 20, 2016 at 8:04 am

I’d love to see this stuff fleshed out into an article if you have time / need ideas!

Reply

12 SeanNo Gravatar January 19, 2016 at 3:34 pm

I bought some ag, auy, ngd, kgc , cde and started a position in premium. It looks like people are selling miners in anticipation of major gold drop which could happen in march/April. I think the miners are already priced for the drop in pms. After the low, we are going to see new highs in the metals and the miners. By next year I think things will turn strongly in our favor.

Reply

13 FI FighterNo Gravatar January 19, 2016 at 6:30 pm

Sean,

Awesome buys there! Today was a great day to be a buyer and you’re essentially buying all these stocks at 52 week lows…

Gotta say, I’m a huge fan of AG at $2.50 and NGD at $1.80, in particular…

Yeah, it will be interesting to see where things go from here… If today was a sign of what’s to come, I’m guessing gold at $1,000/oz is just around the corner…

Exciting times!

Reply

14 ishkbobNo Gravatar January 20, 2016 at 3:51 pm

Interesting read. Not sure I agree with the approach to investing in gold and miners. I’ve owned some gold and miners since 2008 and have learned some hard lessons in their behavior. It’s a very irrational space filled with lots of moving parts, and I’ve learned the hard way that I’m not smart enough to understand all the economic complexities involved in the gold trade. Who’d have thought that gold would collapse by 40% during a period of unprecedented money printing? It was too late by the time that I realized that what would seem to be such an obvious correlation between money printing and gold / USD wasn’t so obvious after all. It was too late by the time I found out that fractional reserve banking did not perform as it would have in normal circumstances, and that the traditional rule of $1 printed = $70 worth of credit generated in the economy would not hold (rather, it was a mere 1:4 ratio since the 2008 meltdown), thus allowing strong deflationary forces to persist. And in regards to the mining trades, many miners have been proclaimed to be “undervalued” year after year for the last 5 years, while the mining index continued to collapse from 65 to 12. And take TGZ for example. You may have gotten it for a 30% discount, but there have been lots of 30% discounts in this stock over the last 5 years, right through it’s continuous fall from 2.89 to .39. If one believes strongly in the implosion of the dollar in the near future, then maybe gold is the place to be. I for one would side step this trade and focus on less complex stocks and asset classes. Best of luck.

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15 The DudeNo Gravatar January 20, 2016 at 11:46 pm

Why would there be a correlation between money printing and gold? That does not make much sense to me. There could be an indirect relationship if the increase in money supply via money printing leads to inflation, but not if the velocity of money is so low as it was in the past few years. If the velocity of money is low enough, money could be “printed” indefinitely without seeing any inflation. Also, since gold costs money/spade to store, does not provide any intrinsic value other than its use as a commodity, then why would you hold it in a near zero interest rate environment. There is nothing really surprising about this to me. I think where people get themselves in trouble is viewing it as something other than it is: a commodity. People like to associate it with “insurance against collapse and political unrest” and all sorts of other things, but I have yet to see a peer reviewed research paper in a respectable journal that shows any correlation to these beliefs. It’s perplexing to me.

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16 ishkbobNo Gravatar January 21, 2016 at 5:44 am

Agreed with all you said. I failed to appreciate the importance of money velocity in the equation, and simply looked at money supply. Live and learn 🙂

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