"Steal em while they are on sale."
investorsdailyedge.com
investorsdailyedge.com
A Battered Resource Stock Apologist
These are trying times. Most every resource stock is taking a beating. The Dow, S&P and NASDAQ are also getting pounded. Practically nothing is falling in favor for mining and exploration shares. If it would help in the least I’d have a world class temper tantrum or a good cry. It won’t.
My personal stock portfolio is down 30-35% since the start of the year. Few players have any form of bragging rights in this market niche. Speculating can be downright painful. Let’s assess the situation.
I look at a lot of resource stocks every day. Some of them I own now or have owned in the past. Some of them are in the Resource Windfall Speculator portfolio. Some are just observed as they come across the screen. A decent number of stocks are down 5%, 10%, or 15% in a given day! Not a week, month or year. That is absolutely gut wrenching and it reeks of capitulation.
At some point the last sellers do what they must do and the markets then head substantially higher. Are we there yet? I don’t know for sure but the personal pain threshold says we must be close.
Anyone just now entering this market should be licking their chops. Their downside has been greatly curtailed. The upside remains vast. Timing is a critical component in speculating. It’s ideal to buy ‘straw hats in winter’ as Buffet has stated. In this case it’s best to buy Canadian parkas in summer.
Let’s look at an important chart to gain a long term perspective regarding the present situation:
The CDNX is the best representative of the micro-cap exploration shares. The chart shows the relationship between these shares and the price of gold. As you well know the shares typically correlate positively to gold. In fact they normally demonstrate leverage to gold. Presently the shares are at the lowest point this decade vs. the price of gold.
When such occurrences happened in the past exceedingly attractive share price rises resulted. Both 2001 and 2003 proved to be outstanding buying opportunities.
Either the shares must appreciate or the price of gold must come down in order for this anomaly to normalize. I’m no Nostradamus but the price of gold looks to be going nowhere but up. Current monetary, financial and economic events could scarcely be more gold and silver friendly! The obvious discrepancy is with the shares.
I’ve spent the last 15 years analyzing the resource sector during most every moment of my spare time. There has been much good, bad and ugly. The present market is more perplexing than any other on memory. The shares continue diverging from the commodity prices. There is zero froth present. In fact froth is in negative territory.
The divergence of shares and gold happens at times but it never persists. If markets were totally predictable all participants would be rich.
Where to from here? Another weak summer resource sector isn’t a great surprise. That is what happens more times than not. It’s hard to “sell in May and go away” because the first time you do will undoubtedly be one of the exceptions to the rule. How do you pare back positions when commodity prices are performing spectacularly? It’s better to expect summer weakness and position accordingly. The traditional fall rally isn’t far away.
This can be said for sure…………. If we don’t pull out of the present slide it will be the first time I’ve ever seen it happen. This is one of the most cyclical markets of all. Maybe the earth is rotating on a new axis but you shouldn’t count on it.
It’s best to stick with history instead of the present pain. We must be getting closer and closer to the point where this market will turn back up. There is no scenario I can envision under which the need for key natural resources is going away.
My five favorite commodities are gold, silver, oil, gas and uranium. These commodities are presently at attractive price levels. Gold, silver and uranium are slated to head substantially higher. I expect oil to fall back in price but remain near $100 (barring global military “adventures”). Natural gas prices should remain high for years.
The bull market in these select commodities isn’t going away. Sooner or later, the underlying stock prices will return to favor, with leverage. That’s what history dictates.
Several small gold stocks have recently come out with what should be earth shattering exploration news. The stock prices have shot up initially but haven’t held. Even these stocks get pummeled with the overall sector. No one cares. It screams of opportunity.
Until this market resumes “normality’ you should continue buying your chosen stocks at your price only. There is no reason to pay any premium. Steal em while they are on sale.
The next 4 to 6 weeks should provide ample opportunities to buy anything that suits your fancy. Late summer and mid November to mid December (tax loss selling) are the classic buying seasons. You take the punches the market gives you and you take the gifts the market hands out. Only a steely determination will help navigate these waters successfully.
Battered but nowhere near broken,
Rusty McDougal
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