In 2011, equities were cheap compared to the overvalued gold miners. Now two year later the cycle is the reverse, gold miners are cheap compared to equities. Investors are going into debt to buy blue chip stocks and short junior gold miners. Now is the time to pick up the mining shares on the cheap when the masses are borrowing money to short the miners and buy the overvalued equities. This trade of short miners/long blue chips may be coming to a painful end.
We know these margin fed rallies usually end with a lot of pain. Don’t forget the dot com bubble of 1999 or the subprime crisis in 2007.
With regards to gold and silver, I believe we are very near a bottom as the short position reaches a record level. I see the downside risk for gold as maybe $50 and the potential upside of thousands of dollars. The time to buy is when funds are facing redemption and marginal players face capitulation. We may have seen that at the end of 2013.
Experienced players have never seen the shares at such bargain prices and are continuing to accumulate. The majors are already beginning to make major changes, selling assets and cutting expenses. We may be near a major bottom that comes around maybe once in a lifetime. That is why we are seeing an uptick in M&A activity such as Goldcorp’s (GG) offer for Osisko (OSKFF) and Primero’s purchase of Brigus.
I never thought we would see this buying opportunity happen again in my lifetime but the media, who are owned by the banks who have shorted this sector to oblivion, have wiped the marginal investor out and forced them to sell assets for pennies on the dollar.
This is the law of the casino. Many go home empty handed, while only a patient few who can withstand losses eventually come out winners. I believe the selling capitulation now is giving value investors a major gift who may soon enter this beaten down sector big time.
Look for savvy investors come swooping in to pick up shares in early 2014 as they may see unbelievable opportunities in this space. Smart investors are on the lookout for assets trading at significant discounts to what major investors paid recently.