In his recent market commentary, Chairman
of Sprott Global Resource Investments Ltd. Rick Rule warned that the current
upswing in commodities and precious metals could be overheating.
Over the last three months, precious metals and
natural resources have edged higher. As of March 3rd, gold was up 9%
over three months.1Commodities
rose by a similar number, as per the Dow Jones-UBS Commodity Index.2The AMEX Gold Bugs Index, which tracks
gold companies, is up 23% over that period.3
Investors are piling in as a result.Bloomberg reports4: “Hedge funds
raised bullish gold wagers to the highest in more than 14 months amid mounting
concern that the U.S. economic recovery is weakening.”
Rick believes the rally will face difficult times,
testing the courage of investors currently entering the market. “These
double-digit gains in many stocks over a couple of months are not sustainable,”
he believes. “This recovery will need to consolidate in order to push further,
so prepare for the stocks to come down in the near term, yielding attractive
entry points in the summer.”
Some stocks are temporarily selling 30% or 40%
higher simply because of the excitement brought on by a couple of good months
in the sector, says Rick. Some investors may want to use this opportunity to
take some gains, especially if you have ‘mistakes’ in your portfolio that you
want to get rid of.
He explained his take further during an interview at the recent PDAC convention:
“I suspect that the rally we are in now is a false rally,” he said, explaining that we
will see more of a drawn-out ‘bottoming’ process than a swift bounce off of a
bottom.
This bottoming process could last at least through
the summer, he said. Many of the issuers could be ‘challenged’ during that
period.
“The lower end of the market is still headed to its
intrinsic value, which is, of course, zero,” he explained.
These companies going ‘extinct’ would be very
healthy for the market, he says. It would be similar to what occurred in the
late 90’s, which eventually set the stage for the bull market for precious
metals and natural resources that ensued.
Today, we are still waiting for such an event in
natural resources to occur. “Probably 60 percent of [mining] companies on the
exchange are trying to stay alive – doing financings to pay the rent and pay
salaries – which is not the way to grow,” says Rick.
These companies are able to keep going now because
the market has relaxed, Rick believes, but that is unlikely to continue as this
intermediate rally dies down.
Investors are mistaking this short move up as a
broad bull market for natural resources and precious metals, becoming “too
bullish too soon,” says Rick. “The recovery is here… but it’s going to take
much longer to take off than people think it is.”
Rick Rule is the Chairman and Founder of Sprott Global Resource Investments Ltd.,
a full-service brokerage firm located in Carlsbad, CA. Sprott Global is an
affiliate of Sprott Inc., a public company based in Toronto, Canada. Mr.
Rule leads a team of earth science and finance professionals who form an
intellectual pool for resource investment management. He and his team have
experience in many resource sectors including mining, oil and gas, water,
agriculture, forestry, and alternative energy.
2https://smallcappower.com/wp-content/uploads/www.google.com/finance?q=INDEXDJX:DJUBS
3http://finance.yahoo.com/q/cp?s=%5EHUI
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and is not intended to be an offer or solicitation for the sale of any
financial product or service or a recommendation or determination by Sprott
Global Resource Investments Ltd. that any investment strategy is suitable for a
specific investor. Investors should seek financial advice regarding the
suitability of any investment strategy based on the objectives of the investor,
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possible loss of the principal amount invested.
Generally, natural resources investments are more
volatile on a daily basis and have higher headline risk than other sectors as
they tend to be more sensitive to economic data, political and regulatory
events as well as underlying commodity prices. Natural resource investments are
influenced by the price of underlying commodities like oil, gas, metals, coal,
etc.; several of which trade on various exchanges and have price fluctuations
based on short-term dynamics partly driven by demand/supply and nowadays also
by investment flows. Natural resource investments tend to react more
sensitively to global events and economic data than other sectors, whether it
is a natural disaster like an earthquake, political upheaval in the Middle East
or release of employment data in the U.S. Low priced securities can be very
risky and may result in the loss of part or all of your investment. Because
of significant volatility, large dealer spreads and very limited market
liquidity, typically you will not be able to sell a low priced security
immediately back to the dealer at the same price it sold the stock to you. In
some cases, the stock may fall quickly in value. Investing in foreign markets
may entail greater risks than those normally associated with domestic
markets, such as political, currency, economic and market risks. You
should carefully consider whether trading in low priced and international
securities is suitable for you in light of your circumstances and financial
resources. Past performance is no guarantee of future returns. Sprott Global,
entities that it controls, family, friends, employees, associates, and others
may hold positions in the securities it recommends to clients, and may sell the
same at any time.
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