The Gold Report: Clive, please tell us how market quantification techniques can help investors predict reasonable points of entry and exit in the precious metals stocks.
Clive Maund: The goal of what you call quantification techniques is to identity undervaluation and oversold conditions; the greater the undervaluation and the deeper the oversold condition, the more probable it is that a stock will advance after it has been purchased. Sound fundamental analysis will highlight the former and needs to be undertaken with an awareness that many companies will obfuscate their true financial state, or even plain lie about it; traditional tried and tested technical analysis (charting) techniques will identify the latter.
TGR: What about holding onto gold bullion and silver ingots? How does buying or selling the real thing compare to buying and selling precious metal stocks from your point of view?
CM: Nothing beats holding gold bullion and silver ingots. Quite apart from the psychological benefit of being in possession of physical gold and silver, which leads to a feeling of well-being and security that I am quite sure translates into improved health, the fact is that you have your hands on real money. In a sense the paper value of this real money is irrelevant; it is the paper that is intrinsically worthless at the end of the day, not physical gold and silver.
Seasoned holders of gold bullion and silver ingots know that they can ignore the blizzard of fiat swirling around them—it's only the little guy who sits nervously on the edge of his chair watching the price of gold and silver in fiat currency. In this sense gold and silver are as solid as a rock. The purpose of investing in or trading precious metals stocks is to leverage the potential gains of gold or silver measured in fiat, and it is much more risky as individually they can collapse into worthlessness as gold or silver never can. If you aren't buying precious metals stocks with the aim of leveraging potential gains in gold and silver, you would be better off buying the metals themselves.
TGR: Are we currently looking at an optimum entry point for buying precious metal stocks? If so, why? How can buying precious metals stocks be justified in a situation where gold and silver prices have fallen so hard and fast this year?
CM: I believe that we are. Gold and silver have been sidelined over the past couple of years as a result of hot money piling into markets that have been driven higher by unbridled expansion of fiat currency, notably the stock market and real estate. The competitive devaluation of currencies has continued at breakneck speed. The Federal Reserve, which should have been setting an example, is leading the charge with its doomed and irresponsible policy of quantitative easing (QE), which is the fraudulent dilution of the currency.
The key point to grasp here is that we are way past the point of no return. Especially in the U.S., the Fed has no choice but to continue with QE or even to expand it. The talk of "tapering" is a red herring, designed to create trading opportunities for its cronies as the masses hang on to the Fed's every utterance. The fact is that if the Fed really did try to taper, the economy and stock market would go cold turkey and implode, and it knows it. Once markets really grasp that money supply expansion is here to stay and is going to accelerate, then there is no other way for gold and silver to go but up.
Any attempt to manipulate gold and silver prices lower by powerful plutocratic entities is doomed to fail as the paper market will be made increasingly irrelevant and sidelined by intensifying physical buying. I believe that physical buying will eventually curb manipulative forces by arbitraging away the gap between paper and physical prices, or at least putting a limit on it. In other words, if the physical price continues to rise, then the paper price will be dragged higher, possibly kicking and screaming as the manipulators dig their heels in. But they cannot stop the inevitable.
Here's another point: The extent to which manipulators have been successful in driving gold and silver prices down in the recent past is a measure of how big a bargain they are now, and of their potential for recovery as the money supply expansion and competitive devaluation continue inexorably.
TGR: What is the role of public opinion in moving precious metal share prices up and down?
CM: Public opinion is of crucial importance, because the public, en masse, is always wrong. What matters is the level of public bullishness, or as now, bearishness, and its trend. The public has been extremely bearish toward gold and silver in recent months, which is a sign of an important bottom. The public is starting to get less bearish, so we have a rising trend, but are certainly not yet bullish. We have a lot more upside yet before the public is so bullish that we need to worry about a potential top reversal.
TGR: What is the effect of large investment firms shorting precious metals?
CM: The prolonged naked shorting of the precious metals stocks has been immensely destructive to the sector and has left a battlefield littered with corpses, like the first day of the Battle of the Somme. This naked shorting is, of course, a scam, as firms can bombard a stock in a weak market environment until it collapses like a self-fulfilling prophecy, and then move in and cover its shorts on the cheap. The regulators have been turning a blind eye to this and we must wonder why that is.
The bright side of this of course is that when the dust settles at the end of the sector downtrend, the surviving companies can pick themselves up, dust themselves off and look around at a world in which much of the competition has been eliminated, before they notice a great hulking predator standing right behind them waiting to gobble them up for their assets, which is also good for shareholders at this point, of course.
TGR: What are your charts telling you about gold and silver now?
CM: We are seeing strong evidence that gold and silver are completing major reversal patterns, which are taking the form of Head-and-Shoulders bottoms. These reversal patterns have been accompanied by the classic diminution of downside volume on each successive drop, which is characteristic of valid Head-and-Shoulders bottoms and indicative of the exhaustion of selling pressure. At this point the prices of both gold and silver are believed to be marking out the Right Shoulder lows of their respective patterns, and we have all the accompanying mood of gloom and doom and despondency toward the sector that is music to the ears of the true contrarian, who recognizes it as the dark before the dawn.
We can see these completing Head-and-Shoulders patterns to advantage on the 1-year charts for gold and silver shown below. If this interpretation is correct, then it is obvious that we are at an excellent entry point for the sector from a price/time perspective right now. It's a great time to load up on gold and silver themselves, of course, and also gold and silver ETFs and the better precious metals stocks, and for those who want more leverage, calls in the sector.
TGR: What gold and silver companies are best weathering the storm? And how are they doing it, if they are? You have written that shares in Barrick Gold Corp. (ABX:TSX; ABX:NYSE), McEwen Mining Inc. (MUX:TSX; MUX:NYSE ) and Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) are moving on an upward slope, whereas others are not doing as well in the markets. Do you have any firms that you think are the strongest picks right now?
CM: Companies that have weathered the storm best are the ones that have the strongest balance sheets and a high asset-to-debt ratio. The ones that have been in the most desperate position are the ones that have had to keep going, cap in hand, to the markets for more cash. Relentless stock dilutions have soured investors toward these stocks and driven their prices relentlessly lower so that many have a high number of shares in issue and now lack credibility, and are on the verge of going under.
In looking for opportunities in the sector, investors should "keep it simple"—look for a strong balance sheet with cash in the bank, strictly controlled costs, a transparent accountable management (that'll be the day!), and proven assets in the ground. The best stocks are those that are either producers or set to go into production in the foreseeable future.
One of the biggest problems is management. Management incompetence and corruption has destroyed countless mining companies over the past several years, even those which, had it not been for management, would have had a bright future. At the risk of sounding quaintly old-fashioned, the trick is to find companies whose management is dedicated primarily to making the company a profitable concern, rather than to siphoning money out of the company and into their own bank accounts via inflated salaries and other freebies, and living the high life with endless junkets, meetings which accomplish little and expensive trips. Human nature being what it is, this is a tall order.
Getting more specific and starting with the ones you mention, Barrick has had some serious problems with its huge Pascua Lama project in the high Andes on the Argentina-Chile border. Management members would have been well advised to put some boots on and take a little more oxygen when they went there. That said, however, this has been priced into the stock that took a beating on the recent write-down, which was why we recommended the stock and its options on the site a while back. Barrick stock appears to be in the late stages of a fine Head-and-Shoulders bottom.
We must keep in mind that McEwen Mining was created by Robert McEwen, the person who started Goldcorp Inc. (G:TSX; GG:NYSE) from scratch and brought it up to being the second biggest gold mining company in the world, so the potential here is obvious. We went for McEwen on the site before it leapt in August. It too looks as if it is completing a base pattern and is cheap here at about $2.50/share, compared to when it peaked in 2011 at over $9.50/share.
Silver Wheaton, which has loads of silver, is an obvious play on an increase in the silver price. The solid fundamentals of Silver Wheaton are reflected in the fact that the price hasn't reacted back all that much, considering what has happened to most other stocks during the same period. It too looks like it is picking itself up out of a base pattern, and unless management does something really stupid, it should perform well as silver gains upside momentum.
Both Goldcorp and Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) look as if they are in the late stages of basing patterns and are at good entry points.
Gold Resource Corp. (GORO:NYSE.MKT; GORO:OTCBB; GIH:FSE) is intriguing here. It has taken a brutal hammering over the past year or so, dropping from about $26/share to around $6.70/share, but over a week ago it put in a large "bull hammer" at a new low on huge volume, so while this is admittedly bottom fishing, it could be very close to a final low here as the price has just drifted back near the low of the hammer.
Scorpio Gold Corp. (SGN:TSX.V), which has been stomped into the dirt over the past several years, saw immense buying some days back, which drove its volume indicators through the roof. This is looking like a most attractive, if speculative, play at this juncture.
The two old silver stalwarts, Coeur Mining Inc. (CDM:TSX; CDE:NYSE) and Hecla Mining Co. (HL:NYSE) are also looking as if they are at good entry points here, although I would like to see improvement in upside volume in both of them, which has been weak in the recent past.
TGR: How are acquisitions working out this year for the precious metals companies? Goldcorp, for example, acquired Wheaton River Minerals Ltd. Any other gold or silver firms making acquisitions that you find favorable? How long will the basement prices last, if history is an indication of cyclical movements?
CM: I can only make general comments, as I do not know the details of recent acquisitions. You will recall me saying earlier that the mining sector now looks like the battlefield after the first day of the Somme, with losses aggravated by relentless naked shorting, which has resulted in the failure of many companies. The key point here is that the mining sector is not going to cease to exist.
As we know, mining costs have continued to rise substantially in recent years. If you have a situation where many mining companies are put out of business by being put in a vice between a combination of a falling price for their product and an inability to raise capital to continue operations, then it is obvious that a shortage of gold and silver will develop in the future. This is especially true in our current situation, where we have high physical demand, which is growing rapidly in Asia where the precious metals are much more highly regarded as a store of wealth than in the tired old West.
The resulting shortage must eventually lead to higher prices, which would lead to higher prices still as investors, seeing the new uptrend, pile in again to take advantage of it. From all this it is clear that with the precious metals sector still flat on its back, there has almost never been a better time for heavy hitters to go mopping up the better stocks and properties on the cheap.
The key point here is that companies are going after assets in the ground to add to their inventories, and they are seriously cheap now given the drubbing that most stocks have suffered. That's what matters—the more proven gold and silver a company has in the ground, the more attractive it is. As for timing, the time is now; the sector appears to be in the late stages of basing.
What about the worst-case scenario, where say the Fed pulls the plug and we experience serious deflation? In this scenario gold might fall in price, but because it will probably fall a lot less fast than just about everything else, you should still do all right.
TGR: Do you have any particular firms that you like in the Americas?
CM: The key point about companies in the Americas is that you need to avoid stocks in companies that are heavily invested in risky countries like Argentina and Bolivia. Argentina has become a very risky place to invest. The current government of Cristina Kirchner there first nationalized (grabbed) the pension savings of its citizens several years back. Then it grabbed the assets of the Spanish company Repsol a year or two ago, and the latest is that it in effect kicked LAN Argentina Airlines out of the country a month or so ago, by telling it that it can no longer use its hanger at Aeroparque in Buenos Aires, despite it having a contract to use it until 2023. You get the picture? A company can think that it owns a mine, and if the government feels like it, it can simply turn up and take it and boot the company out of the country. Small wonder that Argentina has the worst inflation rate in the world at about 25% or more. That is not a place to do business.
Likewise, Evo Morales, the leader of Bolivia, is not exactly fond of "capitalists," so you could invest there only to find out later that the government wants in—and wants you out.
TGR: Thank you for your insights.
Read Clive Maund's ideas for investing in the energy sector.
Clive Maund has been president of www.clivemaund.com, a successful resource sector website, since its inception in 2003. He has 30 years of experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London. He holds a diploma in technical analysis from the UK Society of Technical Analysts. He lives in southern Chile.
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