November 28, 2012 | By Tekoa Da Silva
Disclaimer: This article does not constitute financial advice. Always consult a qualified financial professional before making any investment decisions.
In consideration of the muted share price performance of the mining sector…here are the top ten reasons to consider investing in mining stocks…
1. They Go Down – The extreme share price volatility expressed in the mining sector represents probably it’s best attribute. As we both know, volatility scares the heck out of people, and extreme volatility shakes out the fair weathers…creating amazing buying opportunities for those who understand what volatility offers.
2. Nationalization of Mines - It is true many countries in the world today are taking action against qualified companies developing natural resource deposits. Their actions usually include appropriating the property, removing competent developers, and installing incompetent developers. Once the asset begins to crumble, the country again opens it’s doors, and asks for outside help. Large, influential companies may effectively navigate these waters, but most lack the financial power to handle such an assault. Therefore, strong premiums will develop in the share prices of companies in favorable jurisdictions. The safest in the world might include the U.S., Australia, Mexico, and of course Canada, which might be the safest.
3. It’s Just Paper – In a period of growing concern over paper assets, financial firm and stock brokerage bankruptcies are becoming common. The level of anxiety in the Western financial system is growing, with the gold and silver community representing those with the most distrust towards the system. However, the accumulation of this distrust over time…results in simply weaker share prices. This equates to cheaper shares for investors to purchase, and potentially cheaper acquisitions for companies and funds looking to buy. One might also say…”But if the broker goes bankrupt…your paper will be worthless.” Sure, if there is fraud on behalf of the broker, that can happen. But in a recent conversation with a transfer agent at ComputerShare, I was told, “It’s mostly financial firms and corporations who use direct registration and paper share certificates,”–both of which, are available to individual investors(to read my report on these methods, please see BulletProof Shares).
4. Manipulation – It’s commonly believed that the US Federal Reserve and Global Central Banks, are actively shorting and suppressing gold and silver, along with the mining stocks. I’ve heard this story for years now. Every time the metals go down, there is “manipulation” involved. But what about when the metals go up? Why don’t people complain about the excessively high gold prices? In my opinion, manipulation is a scapegoat for impatience and poor investment timing.
“Billy, why did you eat all the cookies?”, “Sorry mom, the devil made me do it. It was his fault…if he didn’t make me do it, I wouldn’t be in this mess!”
If suppressive manipulation in the metals market is occuring, investors should be toasting champagne and hoping the manipulation lasts as long as possible, as manipulated markets usually result in shortages or price explosions.
5. They Don’t Go Up With Gold – Anyone who’s invested in mining shares for more than the last few years, knows that they outperform the metals. Since 2008 however, they have lagged. Does this mean they will lag the metals for the rest of eternity? Yes, if only four years of history negate the last 100+. In the markets, “temporary dislocations” can last years. Look at long term government bonds for example. Many would say that, “based on the last 30 years, they’ve been going up. That is proof they will go up for the next 30 years.” There is always a tipping point in which the dislocation snaps the other way with the same severity. That point cannot be predicted, and the money is made in defying the belief that, “this is the new normal.” Just for the record the Gold Bugs Index bottomed at 36 in 2000, and sits at 445 today. That represents over a 12x-fold move since the bull market began! Gold moved from $250 to $1750 in comparison, a roughly 7x-fold move.
6. They’re At Historical Lows and Going Lower – Compared against the metals, mining shares are at their lowest levels in nearly 30 years. A 100 year old man was talking about this recently, indicating it has only happened about 5 times in the last 100 years, but as usual, wisdom falls on deaf ears, and in the world of investments that equates opportunity. I seem to recall one of the great investors of our generation, Jim Rogers, saying something along the lines of, he’d “rather buy something when it’s near an all-time historical low, rather than when its at an all time high.” It should be noted he prefers commodities themselves over the companies which produce them, but the historical dislocation represents something. What that something IS of course, is for you to decide.
7. The Charts Look Horrible – One of the most common things I’ve heard all year long, is that, “The charts looks horrible.” What the heck does that mean anyway? Does it mean the company is going to go bankrupt? Does it mean a chart qualifies a company first and foremost? If the chart looked “great”, would it then not be the buying opportunity is currently is? Isn’t deep value usually scorned by the market precisely because it looks terrible on the outset? Can the same be said about a car…or a piece of real estate…if it’s all dirty and beat-up…does that mean it’s worthless?
The “horrible” looking 12 year HUI chart
8. They Have Not Confirmed Themselves - Once something confirms and validates itself, it is no longer what it once was. For example, two boys argue over a green worm. One says it’s a green worm, the other says it’s a butterfly. They bet 2 packs of gummy bears on the argument. They then place the green worm in a box and observe it over the next 21 days. The worm creates a cocoon, and emerges a few days later as a butterfly. Who was right and who was wrong? They were both right, and they were both wrong. But only one made money(or gummy bears) on the deal. Once something validates itself as being the thing in which defies believe, the investment opportunity is gone, and the gummies will have been eaten.
9. George Soros Is Getting Involved - For some strange reason, many people in the world resent success, especially extreme financial success. Enter George Soros, arguably one of the most hated men in the investment world, outside of maybe former IMF chief, Dominique Strauss-Kahn. But the thing to pay attention to here, is that George didn’t become one of the world’s wealthiest men by being an idiot. He built his empire through shrewd investments and business dealings. Those who seek wealth are better advised to learn from those have accomplished such ends, rather than those who advise buying survival kits and hiding out in the woods. As a refresher on the very large positions Soros Fund Management has recently taken in mining stocks, read: The Soros Position Nobody is Talking About
10. Societal Collapse – As some busily prepare for the collapse of society, others (most of whom are far wealthier) are busy creating plans for, and building a fortune. Numerous fund managers are buying large chunks of mining companies, and some are buying entire companies outright. Mine developers see this as an amazing opportunity to acquire projects and are scooping them up. If you know more than them about the sector, and have the self-built wealth to prove it (not just the opinion), by all means, let me know.
If we allow logic to be our guide in the marketplace at this point in time, it would behoove ourselves to consider the most hated sectors of the marketplace, those in which the former cheerleaders have packed up their belongings and gone home. I contest the gold and silver miners might constitute one of those areas.
As John Wayne once said, “Life’s hard. It’s even harder when you’re stupid”. Therefore, let us consult only with the actions and words of those who have already accomplished what we seek and set out to accomplish, and ignore everything and everyone else.
All the best,
Tekoa Da Silva