“You want to fly up to remote British Columbia and see a gold mine?”
Last week, one of my closest sources offered me the kind of field trip I love… Checking out mines and oil fields in exotic locations is one of the best parts of this job. Normally, I’m the first one on board the helicopter.
But this time, I paused… Maybe I had better uses for my time. After all, most gold miners have been terrible investments for years now…
[ad#Google Adsense 336×280-IA]All you need to do is look at the Market Vectors Gold Miners Fund (GDX) to know how terrible the gold sector has been to investors over the past few years.
While the S&P 500 has soared more than 70% since September 2011, GDX – which holds the shares of most major gold producers – is down 75% since it peaked in September 2011 at $66.63 per share.
It has fallen around 15% in the past 12 months.
The smaller gold miners have fared even worse.
The Market Vectors Junior Gold Miners Fund (GDXJ) – which holds a basket of smaller-cap exploration firms – has fallen 85% from its April 2011 high. It’s down around 30% in the past 12 months.
When a sector has been down this long… there’s not much optimism left, and investors give up on the sector. For example, attendance at investment conferences dealing with mining is down to a trickle. Why would investors stick with a sector that just keeps getting crushed when the entire S&P 500 index is soaring?
My good friend, Brent Cook, described the situation well in the recent issue of his Exploration Insights newsletter:
Numerous but increasingly short bouts of optimism in the markets crushed again and again; gold-positive news met with no sustained price move; companies meeting or exceeding their guidance getting hit with more selling than buying; low liquidity and lower interest in anything to do with exploration and mining; mining companies selling good and bad assets at fire sale prices to stay afloat; experts abandoning the field to work in the garden or at Home Depot.
But here’s the good news… this is exactly what a bottom looks like.
Take a look at the below chart of gold. As you can see, gold prices suffered a dramatic drop from September 2011 to July 2013. Prices fell 37% in just more than two years. Since then, prices have moved up and down without going much of anywhere. This “sandpapering” period is when anyone still left in the sector gets exhausted and gives up. Brent describes it as “short bouts of optimism… crushed again and again.”
When the sandpapering phase has exhausted all the sellers and there are none left, the recovery can take place – and prices can start moving higher. My initial reaction to the gold-mine field trip, along with the market’s lack of interest in gold miners right now, suggests we’re near this point in the gold sector.
And we already have a catalyst for higher gold prices. As I showed you last week, massive amounts of money printing by the world’s major governments should soon spark a rally in gold.
We’re already starting to see gold miners move higher. GDX and GDXJ are up around 6% and 7%, respectively, over the past six weeks. Meanwhile, junior gold miner Dalradian Resources (DNA.TO) is up around 21% since I recommended it in my Stansberry Resource Report newsletter in January. And Osisko Gold Royalties (OR.TO), another Stansberry Resource Report holding, is up around 9% since December. I expect all of these names will continue to head higher with the price of gold.
In short, sentiment toward the gold sector has reached a negative extreme… The world’s governments are likely about to push up gold prices… And gold miners are moving higher… This is what a bottom in gold looks like.
And by the way… I’m going on that trip in July.
Good investing,
Matt Badiali
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Source: Growth Stock Wire