Are You A Contrarian, Or A Victim?
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
These are the words of Rick Rule, who is one of the most successful resource stock speculators of our time. Mr. Rule’s famous quote is being put to the test while we approach yet another gold sensitive Federal Reserve Open Market Committee (FOMC) meeting next week. The markets reaction to the statement, which will be given by Fed Chairman Jerome Powell at the conclusion of the meeting on June 13, could possibly have huge implications for the sector heading into the summer.
Meanwhile, the mood in the junior resource complex is nearing “contrarians dream” status as sentiment indicators suggest a valid low happening soon. Not only has the retail speculators collective outlook become uber-bearish, one of the most respected newsletter writers in the complex has stated we are now in a gold bear market. At the Metal Investors Forum (MIF) in Vancouver last month, junior miner analyst John Kaiser began his opening remarks with this statement regarding the gold sector: "We are back in a bear market and my own feeling is it is not clear what is going to take us out of the bear market any time soon".
While it seems as though this may be the case with most of the stocks in the junior complex who control sub-standard projects, I disagree with this broad statement. Although this has been a very frustrating and difficult stock pickers market for the past two years, there continues to be many individual success stories which are trending higher. I own shares in a handful of quality juniors that are trading at, or near, multi-year highs.
However, the appetite for physical gold has been weakening among retail investors overall. Last month saw the fewest Google searches to “buy gold” since July 2007, which was the eve of the global financial crisis. Furthermore, the SPDR Gold Trust GLD contracted 4% across May, erasing the previous two months of share issuance growth with the heaviest 1-month outflow since August of last year.
The rising U.S. equity market has kept gold below $1300 this week, despite a weakening dollar which is coming off a 6% move higher over the past six weeks. The recently falling greenback has also been giving a boost to oil, silver, and copper, yet gold has not benefited from its recent weakness with the buying in large cap equites fueling the appetite for risk.
Meanwhile, the GDX has now reached the lowest ever weekly Bollinger bandwidth in its history, which is setting up a large move very soon. The major miner ETF has continued to trade in a very tight range, which is a sign of an accumulation of energy that will be released once the market presents a catalyst for a move in either direction. The committee results of the FOMC meeting next Wednesday could easily provide such a catalyst.
The Fed will likely raise its target interest rate to above the rate of inflation for the first time in a decade next week, which could spark debate among the committee on when to stop. Because of this wrinkle, both investors and institutional algorithmic trades will be hanging on the verbiage of the speech. There is a good possibility the fallout from the reaction regarding Fed policy will either create the impetus for a final washout down to a re-test of the Feb 9th low in the GDX just below $21, or contribute to the uptrend which began on that day and send it towards strong resistance at $25.
While reading about all of this rampant bearishness, it is hard to believe the gold price is less than $90 away from a multi-year breakout. For the past few weeks, I have been witnessing capitulation in many of the junior resource stocks I follow and have also been noticing volume dry up in many of the quality miners which appear to have run out of sellers. This sector is presenting an opportunity to contrarians with both cash and the nerve to buy an ugly chart of various carefully selected quality juniors. These are the first two requirements for being a successful resource stock speculator.
This continued lack of interest in gold stocks presents an opportunity to research your favorite juniors for desired entry points and if you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at http://juniorminerjunky.com/