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Generational Opportunity To Buy Precious Metals Is Ahead

Monday April 22, 2013 15:28

My long-term readers know that I recommended allocating 20% of assets to silver at an average price of  $17.73 and exited the position in the zone of $48 to $48.50.  I also recommended buying gold in the $600s with an average price of $660, and selling half of the gold holdings at $1904 and the other half at $1757.  Ever since then, our models have suggested not entering long-term positions from the buy side in the precious metal complex.  Now with the benefit of hindsight our calls have proven spot on.

Click here to enlarge the chart.

The big question facing investors is when and where will be the next generational opportunity in the precious metal complex?  In view of the fiat currency printing presses all across the globe, it makes sense for investors to be ready to add precious metals or miners for the very long-term to their portfolios at the appropriate time. 

To understand when the next generational opportunity may occur we divide the precious metal complex into the following categories.

  • Gold
  • Silver
  • Palladium
  • Platinum
  • Major gold miners
  • Major silver miners
  • Junior miners

In the most recent cycle, gold outperformed all other categories.  Prior to that silver outperformed all other categories.  The point is that it pays to pick the right category that may turn out to be the leader in the next cycle.

The chart going back to 1992 illustrates the point.  ETFs such as gold ETF (GLD), silver ETF (SLV), gold miner ETF (GDX), and junior miner ETF (GDXJ) are a relatively recent phenomena.   To get a longer term perspective, the chart compares the Central Fund of Canada (CEF) with other precious metal securities.

CEF used to be our favorite investing and trading instrument before the advent of gold and silver ETFs.  CEF is a closed end mutual fund that was formed on November 15, 1961 in Canada.  The fund invests over 95% of its assets in gold and silver bullion. Its shares are traded on the New York Stock Exchange and the Toronto Stock Exchange.  Gold and silver bullion held by CEF is stored in the highest security rated vaults at a Canadian bank. 

On the chart, CEF is shown in yellow and the scale shows in percentage the difference in performance between the six instruments shown on the chart. 

Before the advent of gold miner ETFs (GDX) and (GDXJ), ASA  (ASA) (shown in grey) used to be our favorite instrument for trading  and investing in precious metal miners.  ASA was originally started in 1958 in South Africa.  Now the company is organized in Bermuda and managed out of the United States.  The company exclusively invests in miners or processors of gold, silver, platinum, diamonds, or other precious minerals. 

The chart shows ASA out performed CEF from mid-1993 to mid-1997 and then again starting in 2001 to the end of 2010. 

On the other hand, CEF outperformed ASA from 1992 to mid-1993 and then again starting in 2011 until now.

The chart also shows that since 2001 ASA has outperformed major gold miners Barrick Resources (ABX), Newmont Mining (NEM) as well as the silver miner Hecla (HL) and Philadelphia Gold/Silver Index (XAU). 

It is also evident from the chart that the silver miner Hecla (shown in green on the chart) never outperformed other instruments.

The purpose of the foregoing is to give you a glimpse of a small fraction of our methodology related to precious metals.  Our methodology for the precious metal complex consists of a combination of ZYX Allocation Model, ZYX Change Method, complex algorithms that detect the footprints of different types of investors from trading data across the globe, and a number of proprietary sentiment indicators especially designed for precious metals. 

Preliminary indications from our models are that in the next cycle, palladium and major gold miners will be the leaders; silver, silver miners, and junior miners will be the laggards.

Here is the anticipated ranking for the next cycle:

  • Palladium
  • Major gold miners
  • Platinum
  • Gold
  • Major silver miners
  • Junior miners

Palladium and platinum are widely used in catalytic converters for automobiles.  New palladium supply is anticipated to fall behind the increasing demand from emerging economies where people are increasingly replacing their bicycles with cars.

Junior miners used to be in vogue.  The thinking has been that junior miners tend to be acquired by major miners resulting in big gains for investors.  Going forward, major miners are likely to become more cost conscious and risk averse.  This will lead to fewer acquisitions of junior miners. 

Now that we have preliminarily identified the leaders of the next cycle, the next question is the timing of purchases.

The major issue at present in timing purchases is that if the momo investors in gold and silver panic, there will be a significant downward flush in the whole precious metal complex.  The chart shows the zone where the momo crowd was buying.  This is determined by our complex algorithms that detect footprints of various investor categories from trading data across the globe. 

The momo crowd is quite distinct and different from gold bugs.  The gold momo crowd buys gold and silver simply because everyone else in their social circle is buying gold and silver, they think it is going up, and they are scared of monetary policy pursued by the Federal Reserve. The gold momo crowd keeps up the ruse that they understand inflation and history, but in reality, my experience is that unlike gold bugs, their knowledge is superficial.

Click here to enlarge the chart.

The momo crowd has not sold gold in any meaningful way and is now sitting on large unrealized losses as shown on the chart. The plan is to patiently wait for the flush and dip a toe in the water by buying starter positions in palladium and major gold miners. 

It is important to note that the precious metal complex is very volatile, data is fed into our algorithms in real time, and it is probable for our algorithms to change recommendations quickly under these market conditions.

In the world of investments, nothing succeeds like getting ahead of the crowd.

Please consider being nimble and staying tuned.

Full Disclosure: Subscribers to The Arora Report have been provided precise buy zones for the strategy described in this article.  Further, subscribers to The Arora Report may undertake short-term trading positions in addition to the very long-term generational opportunity described in this article.

By Nigam Arora
Chief Investment Officer
Courtesy of www.TheAroraReport.com

Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur. He has founded two Inc. 500 fastest growing companies. He is also the developer of the ZYX Change Method to profit from change by investing. The premise is the most money is made by predicting change before the crowd. He is the Chief Investment Officer at The Arora Report and the editor of four newsletters to help investors profit from change.  His record includes the recommendation to back up the truck and buy silver at $17.73, selling all the silver position at $48.50, buying gold aggressively in $600s, selling half of gold at $1904, and selling the other half of gold at $1757.  For more information please visit: www.thearorareport.com

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 precious metal products, 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.

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