Mining stocks: 10 reasons it's time to be brave

The next several months will offer the opportunity to buy on the cheap.

By Minyanville.com May 22, 2013 5:49PM
Hundred dollar bills surrounded by gold © Anthony Bradshaw, PhotographerBy David Banister

I used to half joke with some of my investing friends that the best time to buy stocks is during or right after a crash. Think 1987, 2000-2002, 2008-2009, and now -- perhaps gold miners? 


Well, before we get too far ahead of ourselves, let's examine evidence of a "crash." I like to use crowd behavioral, empirical, and technical evidence in combination.

1.  In a recent money managers' poll, virtually nobody was bullish on gold or gold stocks, and more than 80% of those polled were bullish on the S&P 500 ($INX) and U.S. stocks.

2.  The percentage of dumb money traders (non-reportable traders) in the futures markets with short positions on gold is at all-time highs; they tend to be very long at the highs and very short at the lows.

3.  The insider buying ratio of gold mining stocks to sellers is running over 10 to 1, the highest level since October 2008 when gold bottomed out at $685 per ounce from $1030 highs. Quoting Ted Dixon, CEO of Ink Research, "Such a high level of buying interest among officers and directors within their own businesses in the resource sector has correctly foreshadowed a recovery in share prices in the past: That high point of nearly five years ago came about six weeks before the venture market bottomed on December 5, 2008… While the excitement that surrounded mining stocks as recently as two years ago has waned, experienced value investors recognize that such periods of investor neglect often give rise to the best deals." (Source: TheGlobeandMail.com)

4.  The ratio of the HUI Gold Bugs Index to the S&P 500 is at multi-year lows and in near crash mode on the charts. The RSI (relative strength index) on the weekly charts is at 10-year lows at -13.71, which is off-the-charts' low!

5.  Most trading message boards I view, such as Stocktwits and others, are universally bearish on gold (GLD) and gold stocks.

6.  Gold is in a wave B or Wave 5 down re-testing the 1322 lows, which we have discussed on Minyanville for weeks as very likely if 1470 was not taken out on the upside; this is a normal sentiment pattern and re-test.

7.  Gold has been in a 21 Fibonacci month correction pattern off a 34 Fibonacci month rally from 686-1923. In August 2011, I penned articles from 1805 right up to 1900, warning of a massive wave 3 top forming. Everyone was bullish, and now it's the complete opposite.

8. Currency debasement continues around the world with negative real interest rates. This is bullish for gold once this correction has run its course.

9. Hulbert Digest Gold Sentiment index is at an all-time low.

10.  Gold-silver put to call ratios are at all-time highs.

I could go on and on with headlines and such, but you get the idea. This is the same type of sentiment I wrote about on the stock market on February 25, 2009, here is that article from 321Gold -- and nobody on the planet was bullish.

Below is a chart showing the Bullish Percent Index for Gold Miners. As you can see, the last time we were at 0% was in late 2008 when gold had bottomed out and insiders were also buying like crazy as they are now:
The GLD ETF chart also shows a likely re-test or slightly lower of the 1322 futures lows of April, when insider buying hit 10-year record levels:

Obviously gold could end up going a lot lower than we think, and gold mining stocks could sink further yet. But for those with a three to six month horizon, we expect the 21-24 month gold correction to complete by no later than October 2013. During the next several months, the opportunities to buy some miners on the cheap will potentially make some investors a lot of money in the next few years.

Editor's Note: David Banister is the chief investment strategist and co-founder of ActiveTradingPartners.com, a small-cap portfolio and market advisory service.

More From Minyanville
Tags: GLD
5Comments
May 22, 2013 8:08PM
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Barrick Gold has already traded at $17.51 which was down 60% from it $43.30 52 week high.  It's also paying a 4.1% dividend with a forward PE of 6. Barrick has $14 billion of debt and 140 million ounces of gold reserves which equates to $100 a ounce in debt. If Barrick can mine gold at $900 ounce and gold stays around $1200 ounce they'll be just fine.
May 22, 2013 7:32PM
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I was thinking the same thing but will wait to buy NEM until it hits $25 per share.
May 22, 2013 7:55PM
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Trying to take delivery on any physical metal has been slow lately. just ask the Germans.
May 22, 2013 11:26PM
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 Someone put the life savings half in fold mining shares like newmont at $75 and Barrick Gold at $50 and the other half in call options on gold miners like GFI.
Aug 4, 2013 12:34PM
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I've been following NEM shares for a while, I believe they will drop below $25, when gold hits $1000 lowest $900 (I cant see it dropping as low as it did in 2008). Fingers crossed it doesnt soar back up and bite me.
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