This
could be the ‘bifurcation’ point that we have been looking for, says Eric
Angeli, an Investment Executive at Sprott Global Resource Investments Ltd.
In
‘bifurcation’ the higher-quality companies begin to increase in price while the
rest of the sector continues to underperform.
Small
gold miners and exploration companies are up by nearly 30% as represented by
the Market Vectors Junior Gold Miners ETF (GDXJ) since their lows at the end of
December.1 Eric says this feels like the beginning of a rebound. If
bifurcation continues, we could even be seeing the beginnings of a bull market.
“Many
of the companies have enjoyed good moves upwards, retracing their losses since
September,” says Eric.
“We
are seeing these stocks rise when precious metals prices move up,” he says,
“but more importantly, the stocks are holding their gains when the metals come
down. That suggests that the sellers may finally be done selling and the small
amount of buying pressure that’s coming in has made a difference.”
“I’m
tempted to say that some companies are starting to break away,” Eric concludes.
“The worst ones, however, are not doing much. They are still being punished.”
“This
is very optimistic as far as the start of the year. We are also seeing a lot of
bearish calls from big banks on the broad stock market. Goldman Sachs caught a
lot of flak for its recent report that most stocks that have gone up in the
last year are overpriced.”
A
recent report from Goldman Sachs stated that stocks valuations are ‘lofty by
almost any measure’ with the S&P trading at 15.4 times the year’s projected
earnings as of December 31st, 2013, which was up from 12.7 a year earlier.2
In
another sign of over-heating in the broad equity markets, margin debt on the
New York Stock Exchange is at an all-time high in nominal terms. In
inflation-adjusted terms, margin debt is less than a percentage point below the
peak in July 2007, which occurred three months before stocks started to crash.3
Eric
thinks fear of a bubble in the broad stock market could be bringing more
attention to sectors that have done poorly over that time period, like gold and
hard assets such as uranium, which was up to $35.75 on January 20 from $34.50
on December 30, 2013.4
There
are quite a few examples of companies that have performed well over the last
month – beating S&P returns by a significant margin.
For
example, as of January 23rd, Royal Gold Inc. was up 27% over the previous
month, gold miner Lydian International Ltd. was up 53%, and uranium exploration
company Denison Mines Corp. was up 16%.
Of
course, not all companies have enjoyed gains. Companies that have struggled to
demonstrate they have reigned in costs over the past few years went up, but not
nearly as much.
Expanding
the time frame, we see that most of those that have performed well over the
last month were down substantially over the previous year.
As
Eric says, “Whether we call it a bounce after a decline, or even a small rally,
I am optimistic enough to say a bottom is in place now.”
Similar
experiences have not always led to a sustained recovery. We saw a mini-rally in
the gold sector at the end of the summer which preceded a decline during the
fall and winter months. Therefore, stock price movements over one month are not
necessarily indicative of a broader trend.
Eric
believes that the current bear market will eventually lead to a sustained bull
market, where we see strong moves such as those witnessed over the past month
become more regular – and yield rewards to investors who stay the course, or
especially those who are entering the sector now.
He
concludes: “As Rick Rule says, ‘bear markets are the authors of bull markets.’
Since we have now spent 24 months in a bearish hibernation, we hope this market
move is the beginning of a bull’s charge…”
Eric
Angeli has been with Sprott since 2006, when he moved from major Wall Street
firms Morgan Stanley and Bear Stearns to work under the tutelage of Rick Rule
in the natural resource space. Eric takes a concerted interest in the education
of his clients and is an avid proponent of the value-based investing strategies
of Benjamin Graham. Eric holds a double major in finance and international
business from New York University’s Stern School of Business. To contact Eric,
e-mail him at eangeli@sprottglobal.com or call 1.800.477.7853.
1 https://smallcappower.com/wp-content/uploads/www.google.com/finance?q=NYSEARCA:GDXJ
3 http://www.businessinsider.com/nyse-margin-debt-2013-12
4 http://www.uxc.com/review/uxc_Prices.aspx
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Because of significant volatility, large dealer spreads and very limited
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