Gold and Silver Ground Floor Investor Opportunity In Next Super-Cycle?

By: Jeb_Handwerger

The gold (GDX) and silver (SIL) miners have been hammered down to historic 1999 lows, while the U.S. banks (XLF) and U.S. dollar (UUP) reach new heights.  This is a great opportunity for value investors to enter the mining sector at possibly the ground floor of a commodity supercycle. 

Many amateur investors may be prematurely assuming that all is well with the global economic picture.  The fine tuning of the economy by the Central Banks and specifically Ben Bernanke appears to have been a major success to the masses.  On the other hand, astute investors who have learned from history and are aware of the financial risks stemming from currency devaluation.  Could this really be an illusion?  Could the dollar be on the verge of a collapse?  Is The Fed losing control of interest rates that could spike higher? 

Gold (GLD) is undergoing a significant correction after making a huge run from the 2008 low below $800 to $1900 in August of 2011.  Gold is significantly below its 3 year trailing average at $1550 and its 5 year trailing average at $1327.  The last time this occurred was in the late 90’s.  Investors who acquired gold back then saw incredible 660% gains while the equity markets did nothing over the next 15 years.  A similar opportunity could be occurring right now in precious metals and the junior miners (GDXJ).

Long term investors are increasing realizing that this is a historic buying opportunity for natural resources and mining stocks.  We are near thirty year trough in the value of miners.  Commodities are cheap, interest rates are historically low and the U.S. housing, greenback and equity markets are near all time highs.  It seems that many of us, underestimated the powers of the Central Banks on the free markets to manufacture a recovery while suppressing commodity prices for the short term.  However, astute long term value investors realize that this is the time to acquire real assets for pennies on the dollar.  Every action has an equal and opposite reaction.  Eventually, contrarian value investors will be rewarded. 

Don’t get confused by the Fed’s bafflegab.  One week, Bernanke testifies in Washington saying easy money policies must continue to prop up a weak economy or else we could face a significant threat to this recovery.  The markets rally.  The next week, he says he may taper by 2014.  The markets fall.  The Fed appears to be micro-managing the markets as they fear a loss of control. 

Bernanke may have wanted to take a little froth off of the equity markets and prevent oil breaking the $100 mark.  Precious metals are now completely out of favor, which allows Central Bankers to continue devaluing the dollar.  Not allowing the free markets to balance itself out and these constant policy interventions could lead to unknown long term economic consequences.  Eventually, investors could lose confidence in paper assets and get “fed” up with potential devaluation.  Remember fiat currencies over the long term end up worthless as a form of money. Only precious metals have withstood the test of time.  Gold bulls know that time is on our side over the long run and the sector continues to get cheaper in the short term moving to historic discount valuations.

Remember Bernanke is on his way out and Obama is probably looking for an even more dovish successor.  Bernanke will be known for unleashing quantitative easing to boost housing and equities.  The turn for commodities after this two and a half year decline could be right around the corner. 

U.S. housing is now hitting multi-year highs.  Many homeowners destroyed their credit by walking away from their homes and capitulated near the lows four years ago.  We have witnessed a major “V” reversal in the housing and financial sector where the real losers were the ones who did not have patience and sold.  Learn from their mistakes in the resource sector, smart money picked up housing assets for pennies on the dollar back then, while the lemmings walked away from their homes and destroyed their credit.  It may be happening right now in the oversold resource sector.  Four years from now we could see exponential gains in the sectors which the masses are ignoring right now.  Remember most investors chase the latest fad and ignore a crucial rule in the market.  What was the worst performers were over the past two years could be the best performers over the next two.

Right now, we are witnessing a shakeout in the mining sector and precious metals. The losers will be those who capitulate (much like the homeowners who foreclosed) and sell their shares to the smart money, which is now entering the precious metals and commodities sector.  Insider buying and major strategic investments by smart money is increasing.

Now the buzzword in the media is tapering.  A few months ago it was fiscal cliff.  Tapering means to decrease gradually.  The Bankers actually are doing the opposite and are increasing money supply rapidly to the tune of $85 billion a month.  Our foreign debts have reached historic levels.  As interest rates rise from this purported exit, The Central Bank may do a 180 degree turn and continue to print dollars rapidly to pay down increasing debt payment and keep pace with other devaluing currencies like the Yen.

Silver is below its 5 year trailing average in the high teens and gold is breaking below it 5  year trailing average.  We are reaching 2008 and 2001 levels for both silver and gold miners.  At these oversold levels in the past the miners were able to reverse and make exceptional gains.

We should begin seeing some powerful bullish reversals in the junior miners as value investors continue to enter the sector.  It increasingly appears that we are near a potential secular bottom.

Don’t be manipulated by the mainstream press scaring you with headlines about the economic troubles in China or that mining is dead.  Negative people may tell you that the financing markets have dried up.  That is not true.

Already we have seen major increases of Chinese investment in energy, potash and precious metals.   This may be indicating that some of the smartest minds are taking advantage of this discount sale in the miners and are using the media to their advantage.  Be careful of all the bearish headlines on the miners and follow the money.  There is capital for the right mining projects in stable jurisdictions.  Real assets and commodities are historically the greatest hedges against inflation risk and monetary debasement.

Look to the companies that are attracting serious capital and institutional support.  Major value funds have been buying gold mining stocks over the past few months as the precious metal funds face redemptions.  This is characteristic of market bottoms.  Value funds are continuing to buy in one of the most difficult junior mining markets.

Over $11 million was raised this past week for quality Yukon junior miners, which are being completely ignored by the public. This shows strong support for higher precious metal prices.

Investors should look for platinum and palladium projects in safe jurisdictions as the fundamentals are extremely strong with rising industrial demand for these catalysts and declining supply from South Africa.  This supply demand imbalance should impact the price over the long term.

Look for location and the major partners. Watch the uranium space which is gaining a lot of attention as the Russia-US “Megatons to Megawatts” Program expires at the end of 2013.  Remember the U.S. produces around 4 million of the 55 million pounds consumed annually and has depended on these secondary supplies.  Japan is set to turn back on nuclear reactors this summer.  China is building new reactors.

The uranium price appears to be making a double bottom.  Remember the U.S. produces around 4 million of the 55 million pounds consumed annually.    It should be noted smart money is entering the sector in addition to Microsoft’s Bill Gates.  Warren Buffet’s Berkshire Hathaway took a stake in Chicago Bridge and Iron, which recently took over the Shaw Group, a nuclear services provider.  Could Buffett be signaling an opportunity in the undervalued uranium sector?

Keep a close eye on the near term uranium producers the United States.    Cameco just started additional production at their North Butte ISR mine.  Mark my words the Powder River Basin in Wyoming is a strategic area for the future of uranium production in the United States.

Obama just announced a major initiative to fight carbon emissions.  Countries around the world are also fighting air pollution.  The world we live in today is looking to reduce air emissions and the carbon footprint.  Uranium and rare earths are critical metals for that goal.  

In conclusion, turn off the negative news that is broadcasted to misdirect and confuse investors.  Follow the capital to quality situations, which are building value during challenging times and continuing to communicate to shareholders.  It is during these difficult times in the resource sector when the greatest opportunities are discovered.  Remember American Barrick Resources started off as a 16,000 ounce gold producer in the 80′s down market in gold and grew to be Barrick Gold Corp, the largest gold producer in the world.

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By Jeb Handwerger

Disclosure: Author owns no stocks mentioned.

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