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Short-term gold sector pain setting the stage for long-term gains

Commentaries & Views

Recent moves by the Federal Reserve have swiftly brought fear into the marketplace of a major policy error that could alternately lead to a slowdown in economic growth, combined with unstoppable inflation.

Although the precious metals junior sector carnage has been widespread and deep, due to being higher-risk, the entire marketplace has not been spared. With investors deleveraging to build up cash during a likely upcoming Fed-forced recession, Mr. Market has spared no one.

But the pain inflicted on crypto HODLers this week has been far worse than what we have experienced in the gold space. If you had invested $250 million in Terra Luna one month ago, the fourth most popular cryptocurrency at the time, you now have $0.06!

"I lost over 450k usd, I cannot pay the bank," read one of the top posts on the Reddit forum for Terra Luna this week. "I will lose my home soon. I'll become homeless. Suicide is the only way out for me." This is a very sad and harsh reminder that the crypto universe is almost completely unregulated—there are no guardrails, the government doesn't have investors' backs.

Yet, this recent forced selling pain experienced in the marketplace is what has historically begun sustainable precious metals miner bull markets in the past. Once the tech bubble into the turn of the century had burst, I lost 50% of my investment capital during the subsequent deleveraging event into 2003. Then later came to the realization that it was the best thing that could have ever happened to me.

The pain of a large loss of one's capital in the stock market can either force an investor to flee and never return, or turn the experience into a valuable lesson from Mr. Market that has been paid in full. I chose the latter, as the loss inspired me to get to work on honing my investment skills and learn how to make money during a bear market.

Once I discovered the teachings of legendary newsletter writer Richard Russell, his Dow Theory Letter led me to the mining space. And after completely re-educating myself on how to invest successfully upon discovering this sector, which has brought huge returns to investors during numerous past stock market bears, I became financially independent for my efforts.

Since the turn of the century, every major up-leg in the mining space began during or after a -20% decline in the stock market. The S&P 500 is now down nearly 22% year to date, and the Nasdaq is faring even worse, plummeting over 29% this year. This inversely presents huge bullish tailwinds for the entire precious metals complex – as they are viewed as one of the most reliable hedges against economic risk, stagflation and recession.

There were fortunes made by contrarian speculators that placed early investments into a basket of high-risk/reward quality precious metals juniors before PM bull moves took place in 2000-2003, 2005-2007, 2008-2012, 2016, 2018, and 2020. During the 2005-2007 miner bull-run, the huge gains harvested from my junior miner portfolio provided me enough capital quit a dead-end job and travel the globe for the next five years.

I have experienced several deleveraging events over the past 20 years and high-risk juniors can go lower than we expect, then can turn on a dime when we least expect them to. And in my experience during these selling events, it is best to maintain enough cash, while holding core positions in quality juniors to place you in the best situation to root for either outcome.

If the GDXJ is in the process of bottoming near long-term support at $35, junior gold stock speculators holding core positions in a cash account remain highly leveraged to the mining space. But if there is more deleveraging into the U.S dollar in "Sell in May and Go Away" fashion after a short-term bounce, the miners could continue selling off into July and present lower-risk opportunities.

In 2016, the mining space experienced a similar move to the 2020 up-leg from mid-January to August, which saw the GDXJ zoom nearly 300% from an accumulative bottom in just 6 months. Once the 2016 up-leg peaked mid-year, the consolidation of those out-sized gains took 2-years to complete into July of 2018 and bottomed after a 48% correction.

The more recent move in the junior miner ETF from March to August 2020 took just 4.8 months to complete after moving up roughly the same staggering amount form a pandemic induced spike low. A similar 48% correction from an August 2020 peak in the junior miner ETF at $63.72, would see the $33 level being tested possibly into the FOMC meeting at the end of July.

Although this now 20-month consolidation process has been frustrating and extremely challenging to navigate, the Junior Miner Junky (JMJ) real-money portfolio remains primed to participate in the next up-leg and holds an over 40% cash position.

Anyone who remembers the start of the 2008 global financial crisis (GFC) knows the importance of liquidity when marketplace sentiment is tanking. It is also important to point out that the mining space bottomed five months before the stock market during the GFC into March 2009.

Therefore, holding long-term core positions with an ample amount of cash is highly recommended at this time. As my dear departed friend and mentor Richard Russell mentioned may times in his teachings, during bear markets, everyone loses while the winners are investors that lose the least.

The JMJ service provides complete transparency into my trading activities and teaches investors how to navigate the high-risk/high-reward precious metals junior sector. Subscribers are provided a carefully thought-out rationale for buying individual stocks, as well as an equally calculated exit strategy. If you require assistance in accumulating a basket of quality juniors, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.