POST REMINDER – AN ABSOLUTE MUST READ AND WHY WE ARE WADING INTO GOLD MININg STOCKS

FOLLOWING LAST NIGHTS SHARP MOVE IN GOLD AS IT BECOMES EVER CLEARER THAT THE FED IS SHUT IN A BOX ON QE (IE THEY CANT EVER EXIT WITHOUT CAUSING A MAJOR SLUMP), WE THOUGHT IT APPROPRIATETO RE-ITERATE OUR STANCE HERE THAT WE BELIEVE THE MINERS, ON A 6 MONTH + VIEW OFFER THE MOST ASSYMMETRIC RISK/REWARD PROFILE ANYWHERE ON THE GLOBAL INVESTMENT LANDSCAPE TODAY

We bring the following statement from Rick Rule legendary fund manager in answer to the question as to what one should buying to your attention too – 

What should I be buying now? Bullion or mining shares?

If you think that the metals prices are going up, own the metal – not the miners. Own the miners because you think that there is something intrinsic to them that will take them higher. So, to begin with, own cash and the metals. Buy the miners if you can withstand — financially and psychologically — the risks and the volatility of the sector.

There’s a traders saying that warns against trying to “catch a falling knife”. That is, you shouldn’t buy assets which have sharply declined as they’re likely to go down further before there’s any recovery. We’re not sure when this saying gained popularity but suspect that it speaks a lot to the short-term mentality of most investors today. Because history suggests that you should do the opposite – buying assets down 60% or more has delivered fantastic results on 1, 3 and 5 year timeframes. And intuitively this makes sense. If almost everyone has sold out of an asset and there are only buyers left, there’s usually only one way for prices to go.

Given this, let’s take look at the assets which have been pummelled and may be due for a comeback. Globally, the most obvious standouts are Greece and junior gold miners. There are others though, particularly in agriculture, where sugar and coffee are still down 75% and 65% respectively from their all-time highs in the 1970s.  Stocks in China and Japan also qualify, down two-thirds from their all-time highs. Vietnam is also a contender, having fallen 60% from its 2007 high. And among currencies, the Indian rupee is worth considering, given that it hit all-time lows versus the U.S. dollar in recent weeks. Of the above, gold miners, coffee, Vietnam and the rupee look the most interesting.

What happens when you buy assets down 80%?

Over the past week, global fund manager Mebane Faber wrote a brief article with the aforementioned title. Specifically, he looked at the performance of sectors, industries and the total stock market in the U.S. after they’ve been hammered. And here’s what he found:

Average 3 year nominal returns when buying a sector down since the 1920s:

Down 60% = 57%

Down 70% = 87%

Down 80% = 172%

Down 90% = 240%

Average 3 year nominal returns when buying an industry down since 1920s:

Down 60% = 71%

Down 70% = 96%

Down 80% = 136%

Down 90% = 115%

Average 3 year nominal returns when buying a country down since the 1970s:

Down 60% = 107%

Down 70% = 116%

Down 80% = 118%

Down 90% = 156%

Faber went on to conclude:

“It’s hard to buy something down 80%, especially when you owned it when it was down 30%, 50%, then 80%. But usually that is a great time to be wading in … Some recent examples of assets that have got clobbered include tech in 2002, homebuilders in 2009, and Greece and (Junior) Gold Miners now.” We all know what happened to the formers over subsequent years – major rallies ensued in which few participated.

Other supportive evidence

Faber isn’t the first to notice this phenomenon. Some years ago, two U.S. professors, Werner DeBondt and Richard Thaler examined the investment performance of U.S. stocks with the worst and best prior investment results. In each year from 1932-1977, the professors selected the 35 best and worst performing stocks over the preceding five year period. And the results were compared to a market index, namely all of the stocks on the New York Stock Exchange.

They found that the worst performing stocks over the preceding five-year period produced cumulative returns 18% better than the market index some 17 months after formation. Meanwhile, the best performing stocks in the five years prior produced returns 6% below the market index over the subsequent 17 month period

Smaller gold companies have been annihilated after the gold price peaked in September 2011. The GDXJ junior gold miners ETF in the U.S. is down around 80% since that time. You don’t have to be bullish on gold to see upside for the junior gold miners, many of whom are now priced for oblivion. If we’re right, and history rhymes, we could be looking at triple digit gains here over the next 12-24 months.

We have been greedily buying up assets this last few weeks in our Mining & Precious Metals fund that are being opened up to the public in the next week as we now have our FCA authorisation. If you’d like more details on these funds then click the link below and register your interest.