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While the precious metals sector has consolidated and struggled to
find a bottom, an important development has taken place. First, lets harken back to 2007-2008.
Large cap mining stocks peaked in March 2008, yet the speculative sides of
the sector “gave out” far earlier. The juniors and silver stocks
actually peaked in April 2007. That was about a full year ahead of the large
gold stocks. As the 2007-2008 crisis unfolded, juniors and silver stocks led
the way down and displayed extreme relative weakness even as metals prices
were firm.
Today, we have an entirely different and bullish development. As you
can see in the chart below, the speculative areas of the sector have been
outperforming the large gold producers (GDX). If this were really an end to
the bull market or another collapse, the juniors and silver stocks would not
be showing this kind of relative strength. In fact, the silver stocks have
actually managed to hold near their 2010-2011 lows even as gold stocks have
broken to new lows. We also see that the CDNX has been outperforming GDX
since October while GDXJ has been outperforming since December.
 
Given the recovery of the past few days, we are likely witnessing the
start of the next cyclical bull market for the gold and silver stocks which
have essentially been in a cyclical bear or correction since December 2010. The
above analysis implies that the more speculative areas of the sector, the
juniors and silver stocks will be the leaders.
The reemergence of the bull market will mark the inception of the
third and final phase of this bull market. The stealth phase took place from
2001 to 2007 while the wall of worry phase has been in place since 2007. The
wall of worry phase consists of muted gains, subdued sentiment and improving
valuations resulting from rising profits but stagnant stock performance.
During its final phase, a bull market experiences widespread participation,
increasing valuations and increasing speculation. The current relative
strength in the speculative areas of the sector (juniors and silver stocks)
is a harbinger of things to come.
The reasons for such outperformance are simple. As a bull market
progresses, speculation will naturally increase. A move in Gold above $1900
will increase the appeal of Silver which always outperforms during an
uptrend. Moreover, many producers are generating record cash flow and
profits. Given the market’s desire for growth and the current values in
quality exploration and development companies, it is only a matter of time
until we see increased takeovers and mergers and acquisitions. Such action
would obviously ignite the junior space.
We personally continue to focus on 1) producers with strong
development projects that can become mines and 2) exploration companies with
strong capital structures operating in the best jurisdictions.
Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com
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