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A Golden Opportunity With Miners, Part I

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This commentary is not for all investors. Sadly, many if not most investors will never know the intellectual (and financial) satisfaction of truly “buying low and selling high”. When some company (or even an entire sector) is falling in price toward some long-term bottom, most investors will be fleeing in panic – rather than edging closer, sensing opportunity.

The popular (but apparently mistaken) belief in the West is that the Mandarin characters which represent the Chinese word for “danger” also can be used to represent the word “opportunity”. The fact that this botched-translation has achieved cliché status here in the West is, in fact, because it articulates one of the most time-tested principles of Contrarian logic.

There is no better context in which to demonstrate this principle than in markets. The vast majority of investors are bandwagon-jumpers. This is in no way intended as an insult. It is a simple statement of empirical evidence and human nature.

What should any smart investor invest in: “winners” or “losers”? Most smart investors don’t even have to think about that one – naturally, you invest in the “winners” and shun the “losers”. By definition, a “winner” (in market terms) is something which has already risen in value, substantially. One is jumping on the bandwagon.

Conversely, by definition a “loser” is something which has fallen in value, substantially. To truly “buy low” requires buying losers – i.e. being a Contrarian. Thus while all the talking-heads in the financial management industry parrot the words “buy low, sell high”; the only people in our markets who actually walk the walk are the Contrarians.

If Contrarians are (literally) the only investors in our markets who actually practice the money-making principle of buy low/sell high; then why aren’t all Contrarians fabulously wealthy, and (ironically) thus viewed as Market Gurus? Because sometimes when “losers” go down they never come back up again. Anyone bought any “Kodak film” lately?

One must be a Contrarian if one wishes to even attempt to “buy low and sell high”. However, one must be an intelligent Contrarian (or at least a competent one) to do so successfully. We can summarize the challenge which faces investors with a simple metaphor. Being a successful Contrarian means being able to discern between a “low tide” (which precedes a high tide), and a ship which has absolutely (and permanently) “run aground.”

This brings us to the Mother of All Low Tides: the precious metals sector. Envision two sectors. One sector has been rising for twelve consecutive years, during which time it has outperformed all others (and produced stellar returns for investors).

The other sector has been shunned by mainstream investors to the point where the majority of market participants have invested only roughly 1% as much capital in this sector as the historical average, throughout the entire history of our markets. It is continuously described by the mainstream media as “about to collapse”, and avoided by most “respectable” financial management professionals because it is “too risky.”

Now try to wrap your head around the notion that these “two sectors” are the same sector: precious metals. How is it possible that the best-performing asset class over the past twelve has been (and remains) more under-owned than at any time in the entire history of our markets?

 

I’ve already answered this question. Twelve years of mainstream Chicken Littles warning investors continuously that “the sky is about to fall” on gold and/or silver. Twelve years of financial management professionals warning their clients that the best-performing asset class was/is/will always be “too risky.”

Now, after this (simultaneous) twelve-year low-tide/bull market in precious metals; the “low tide” has gotten even lower, the Chicken Littles suddenly even more shrill. And nowhere – anywhere in markets – has the tide receded as far as it has with the gold and silver miners; producers of these shunned-but-outperforming commodities.

With prices having fallen over the short term in both the bullion markets, and fallen much further with the majority of the miners; investors have a clear-and-simple choice as to whom they listen in answering the question “what comes next?”

They can choose to listen to the same mainstream Chicken Littles and same financial management “professionals” who have unerringly and unequivocally been wrong about precious metals; month after month, year after year. Or, investors can choose to listen to the much smaller cadre of professionals within the precious metals sector, who have been consistently right over that same time period.

Before you make your decision, let’s perform a quick idiot-test. One of the most frequent accusations made by the mainstream flock which routinely/rabidly denounces precious metals is that gold, or silver, or both are “in a bubble.” Now the idiot-test: how can any asset-class be “in a bubble” when practically no one is holding it?

Time for a reality-check. Each reader can ask themselves this simple question: do you know any friend/relative/business acquaintance who currently has any significant holding in precious metals?  From experience, I can provide the answer to that question for the typical reader.

Their answer would either be “zero”; or “one”, with some mental notation in brackets beside the one which reads “kook.” Now the second half of the reality-check.

During the “dot.com” bubble, when the same media Chicken Littles and financial management professionals were shouting “buy, buy, buy” right to the bitter end (i.e. implosion); can any reader recall a friend/relative/business associate (invested in the market) who did not have significant holdings in tech stocks?

Our idiot-test is completed. When “everyone” is holding an asset class; that is a bubble. When less than people than ever are holding an asset class; we have the opposite of a bubble – i.e. low tide.

Readers are nearly halfway there in being able to answer the question “why invest in precious metals miners?” You are now aware of the absolute “low tide” which has existed in the precious metals sector throughout this twelve year “private party” for the tiny contingent of investors who have bought into the best-performing asset class. You’re now aware that the tide has receded even further (and what that represents to the Contrarian investor).

Readers know that the community of mainstream media scribes and investment professionals to whom they have listened over those twelve years regarding precious metals have been consistently/absolutely wrong with their fear-mongering. Readers also know that this same legion of talking-heads all fail the simplest of “idiot tests”: being unable to tell the difference between a “bubble” and the opposite of a bubble.

However these are only the negative reasons for investing in precious metals miners. In Part II, I’ll supply readers with the (positive) fundamentals which explain why precious metals has been the best-performing asset class of the past twelve years, and why the miners (in particular) represent the ultimate "silver lining" in this sector.

Then I will spend some time suggesting what they can expect when the real “bull market” in precious metals begins. Or, in other words, what will happen when “the tide finally comes in.”

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Jeff Nielson
...
written by Jeff Nielson, February 24, 2013
I try not to dwell too closely on my investment holdings, especially when they seem to just be treading water. The miners however, have been clearly suffering in the market valuations. For me, I attribute a high regard to dividend payouts as opposed to simply watching the stock prices.

On a yearly basis, the miners as a group seem to be keeping up in this field, but I am concerned for the future. I realize that costs are increasing, but that the earnings from sale of their product is hampered by the manipulated prices at the consumer end. I am betting at least some of my miners survive long enough to finally realize substantial profits when supply dries up of physical metal.

I have to take issue with your Chinese assertion. I am visiting there this April, so I have been giving the language and culture more attention than I would otherwise. A quick whirl of Google translate offered me this:

Opportunity: 机会 Jīhuì
Crisis: 危机 Wéijī

As you can see, 机 is a component of each word.



Dalkrin, I won't question your own understanding of the Chinese language, since I'm on "shaky ground" here, relying upon nothing more than my internet-research.

However, I will question the premise that dividend-paying stocks help to protect us from this serial currency-dilution (i.e. soaring inflation). The problem with such inflation is that is that it FORCES investors to seek "home runs" in their investing OR accept that their "investments" will steadily DWINDLE in value over time (in real dollars).

Modest (taxable) dividends are accepted as an EXCUSE for mediocre "growth" (or no growth at all). My premise is that in looking for "home runs" gold- and silver-miners are our least-worst option. Because of manipulation they are THE most-undervalued assets in our markets -- and thus the best prospects for "home runs." smilies/smiley.gif
Dalkrin
...
written by Dalkrin, February 23, 2013
Thought provoking article here Jeff!

I try not to dwell too closely on my investment holdings, especially when they seem to just be treading water. The miners however, have been clearly suffering in the market valuations. For me, I attribute a high regard to dividend payouts as opposed to simply watching the stock prices.

On a yearly basis, the miners as a group seem to be keeping up in this field, but I am concerned for the future. I realize that costs are increasing, but that the earnings from sale of their product is hampered by the manipulated prices at the consumer end. I am betting at least some of my miners survive long enough to finally realize substantial profits when supply dries up of physical metal.

I have to take issue with your Chinese assertion. I am visiting there this April, so I have been giving the language and culture more attention than I would otherwise. A quick whirl of Google translate offered me this:

Opportunity: 机会 Jīhuì
Crisis: 危机 Wéijī

As you can see, 机 is a component of each word. smilies/wink.gif
Jeff Nielson
...
written by Jeff Nielson, February 22, 2013
Jeff: the biggest disconnect to those of us who follow the PM sector is that at current manipulated prices, only a very few miners are actually making money and not bleeding whatever cash reserves they may have. Projects are being shelved left and right and I would guess that with all of the cost headwinds factored with declining ore grades, this year's global production may actually decline. Although you may disagree, I sense the strong probability of resource nationalism following along with the currency wars; not a good prognosis for the future of private mining companies...


Apberusdisvet, "disconnect" is a gigantic understatement when it comes to both valuations and (so-called) "analysis" from the mainstream on this sector. Sadly, we lack a word in the English language which properly captures the image here.

However, regarding your views on nationalization; let's say my own position is more nuanced. I agree with you that such "pressures" are building. However, what I would point out is that there are dynamics pushing in BOTH directions here.

As an example, let me supply a recent quote attributed to the President of Bolivia (from a post on our blogs) -- a nation which has already had its "nationalization" occur:

...Evo Morales, responded publicly to the poor operating results published by the recently nationalized Colquiri mine. Skipping his usual rhetoric he said he was "surprised by the poor results demonstrated after nationalization" and that "if nationalization does not increase profits, then why nationalize?"

If policies can move in ONE direction; they can move in the opposite direction as well. smilies/smiley.gif
apberusdisvet
...
written by apberusdisvet, February 21, 2013
Jeff: the biggest disconnect to those of us who follow the PM sector is that at current manipulated prices, only a very few miners are actually making money and not bleeding whatever cash reserves they may have. Projects are being shelved left and right and I would guess that with all of the cost headwinds factored with declining ore grades, this year's global production may actually decline. Although you may disagree, I sense the strong probability of resource nationalism following along with the currency wars; not a good prognosis for the future of private mining companies.

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