Titan Investment Partners Bold Call Reminder – We move to a maximum bullish stance on gold stocks

4 mins. to read

It is of course a dangerous stance for a fund management house to go out “in print” as it were and state that we have gone “maximum bullish” on a sector that remains resolutely out of favour. If we are wrong, then people can point back at the statement with glee and say “fools”, whilst if we are right, then simply we collect the returns for ourselves and our clients with no real wider recognition. The brave stance is fraught with risk.

However, that is precisely what our game is here at Titan – to analyse the risk and reward profile of our intended investments and to anticipate major moves that we believe the modern structure of the market, what with lemming analysts and the immutable elements human nature – namely the greed/fear pendulum, miss. We understand this fundamental investment principle intently – without risk there is no reward.

In recent weeks we have been speaking with many individuals – fellow industry participants, traders, potential investors and even our own staff members and magazine contributors. You know what the predominant theme is? Investing in gold and gold stocks now is folly. I don’t know of very many bulls of this sector today, least of all with their own money on the table.

Music to our ears!

The only party that we spoke to that actually seemed to grasp that stocks in this sector are currently generationally cheap (see charts below with explanations) was a seasoned fund manager from Investec of, being polite, “senior years”. He has seen various market cycles and recognises value when he sees it.

When the boat is tipped so extensively one way, as it is now, and yet the background fundamentals are ironically immensely supportive and sector valuations screamingly cheap, it is, usually, the buy signal of all buy signals.

I personally invested through the dotcom boom and the early part of the millennium, when tobacco and so called “old economy” stocks were ragingly cheap and yet you couldn’t sell them for toffee. A man that many modern day fund managers could learn a lot from, and sadly now departed, Dr Tony Dye (known as Dr Doom and who was profiled in this very magazine) who could see the value, stood pat and bought these stocks while shunning the Internet bubble. History proved him right, but he had to sweat along the way (he also lost his job at Phillips & Drew in the process – irony of ironies!). Patience is required in investing is the lesson here. And that doesn’t mean holding for a few days (ask Prince Charles!).

Here’s a link to our latest PDF illustrating just why we are fundamentally positive on the gold mining spectrum – http://www.titanip.co.uk/wp-content/uploads/2013/07/PREC-METALS-PDF.pdf if you want to read our current thinking.

I want to draw your attention to the 2 charts below.

The first one is the ARCA Gold Bugs Index (a spread of gold related stocks) relative to the actual price of gold. It is pretty unequivocal in illustrating that they are the cheapest they have been since the start of the bull run that began in 2000. One of 3 things is likely to happen here. Either the gold price declines further (which we do not expect) and the gold miners largely tread water, or the miners rise in price while gold continues to plateau or modestly rises, or finally, the gold price rises and the miners rally hard. We expect outcome 3.

Now take a look at the GDXJ (junior gold miners ETF chart) over the last 3 years. Note the divergence between the gold price itself (the orange line to the top) and the sector. Whilst the gold price has actually been flat over this timescale, the sector is down nearly 80%. That is some underperformance and, of course, correlates to the chart above. What is telling to us, however, is the collection of positive price action signals as detailed in the chart.

When sentiment is at an extreme, you are a lone voice and valuations scream buy, to many this seems, strangely, to be a “risky” proposition. To us here at Titan, we would argue that in fact buying stocks like Netflix on 30 times book and triple digit PE’s represent the real risk and that we are at an inflection point in the markets now. Those of strong constitution, experience, pocket depth and patience we expect will be handsomely rewarded on an 18 months timescale in the gold miners arena. In our Precious Metals fund – the only spread betting fund in existence dedicated to the precious metals arena we hold a diversified portfolio of related stocks, options and futures positions. To learn more then click the image below.

Spread betting involves the use of leverage or gearing. As such, investments in Titan funds is riskier than investment in conventional non-leveraged funds. Leverage increases losses and gains and you should only invest capital where you are prepared to accept a high level of risk to its security. Margin calls may be made at some point in the future and should you be unable to meet the margin call then you may be forced to crystallise a loss at that point.

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