2013-03-01

Gold miners are the canary in the....gold mine?

In the previous post I linked to a conversation about gold mining shares. I want to clarify my position, as of today, March 1, 2013.

I remain a long-term bull on gold mining shares, but today, I believe they are the canary in the coal mine, warning of a potentially major market sell-off. Global X Gold Explorers (GLDX) is down 70% since inception in November 2010. The S&P 500 Index is up about 15% over the same period.

Many stock market bulls believe the fall in gold is related to the exit of fear from the stock market. Bullishness is high as stocks reach new heights. However, look at the fear in gold mining shares. That is nearly total panic, and the price of gold remains near weighted highs (it is down from the $1900 high, but that was a price spike that quickly reversed). This is evidence of the fear lurking off stage. Gold miners aren't suffering from some unique and extremely dire problem (if gold was around $1200 it'd be a different story); they are showing the first signs of fear returning to this market.

In 2008, emerging markets, gold miners and commodity shares bottomed, while the broader U.S. and European markets bottomed in 2009. I expect we will see the same as the selling in gold mining shares will exhaust itself much sooner, seeing as how it has already begun with gusto. In 2008, it was the same: oil prices were in freefall by July, but stocks didn't implode until September.

If GLDX falls another 50%, the total loss only grows about 15%, to 85%. Therefore, when I say much of the selling is done, there are still potentially huge losses coming. That said, a further 50% drop in GLDX will likely match the fall in the S&P 500 Index, thus in relative terms, the junior gold mining shares are not unattractive today.

While I may hold some key shares, I will take short positions if I see the market turn and will not be long-only. You will know the correctness of hanging on to gold shares by the price of gold. It should outpeform global stock markets by a substantial amount, as it did in 2008. If it does, miners will have high product prices, with strong demand for their product, a midst plunging costs. They will rebound with a vengeance. Other shares will also be bargains, thus investors would be wise to have some cash and a shopping list.

Full disclosure: I have incorrectly anticipated at least 3 or 4 market tops since 2009. I feel less emotionally confident about this call though, which is why I think it may be a stronger one.

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