In fairness, I first learned about the Market Vectors Gold Miners ETF (NYSE:GDX) from a fine young analyst but truthfully I could not get my hands around it. If I don’t believe in the fundamentals of the company you can show me charts all day long, I will not buy into the trade until I am convinced that this can be a profitable trade. There have been times that cost me dearly but I simply have my style or system and I don’t stray from it. Part of my style is that when I am wrong I promptly admit it.
Well Mea Culpa! I was wrong. The GDX has seemingly proved me to be wrong. I had espoused my view that this was not anything more than human reaction to gold (NYSE:GLD) and silver (NYSE:SLV). I believed that investors would rather own gold and silver above the ground rather than real wealth under the ground.
I have always tried not to be stubborn and not be arrogant. Sadly this stock was recommended to me at $52.00 and I watched it flounder for months and was convinced that I was right in my original premise. What I didn’t see coming was that at some point investors would realize that the cost to bring gold and silver out of the ground were at unbelievably cheap valuations. Oil is cheap and labor is cheap and this only adds to a company’s profit margins. Sooner or later I too would recognize that these stocks were selling at amazingly discounted prices. So rather than bemoan the fact that I came to the party late I choose to embrace the fact that I came at all.
For the last few days I have been studying the GDX (which broke into all time highs yesterday) and the Market Vectors Junior Gold Miners ETF (NYSE:GDXJ). On any pull backs I’m going to be a buyer and here’s why. I know who’s who in the GDX. They are the best of the breed mining companies like Barrick (NYSE:ABX), Goldcorp (NYSE:GG), Newmont Mining (NYSE:NEM), Kinross (NYSE:KGC), Anglo Ashanti (NYSE:AU) just to name a few. While I am conversant in these companies, I have no inside knowledge of when one of these companies will make an acquisition so I think while I do own Barrick and Goldcorp. I feel it would be the most prudent to scale out of them on strength and buy the GDX. Below is a chart that my reader sent me that overlays the price of gold, the gold miners and The GDX. A study of this chart courtesy of AgoraFinancial.com shows that in the last two weeks the GDX is up 6%, gold is up 4% and the S&P is down 6%.
That leaves me wanting the GDXJ. When one of the majors makes an acquisition it will be from the pool of the GDXJ. There are too many companies in the GDXJ and as Bernard Baruch taught us you only have to be right 2 out of 10 times with small companies like the GDXJ to be successful. There is no doubt that there will be majors trying to make acquisitions. Which ones do we buy? The answer of course is to buy them all – Buy the GDXJ. Please see the chart of the GDXJ below.
Today the GDXJ was up 3% to close at the line of resistance at $39.18. This stock is poised to breakout to the upside. With the demise of the Swiss Franc gold rose $54.00 to close at $1872. These cash rich major mining companies will be looking to add to their staple gold and silver rich properties and when they choose a company the place they will be looking will be in the GDXJ. The GDXJ is above the 200 day moving average, it is just at the point of breaking resistance and when it does I see nothing but upside potential for the trade.
I have an MBA in Finance and 38+ years of market experience. In 2009, I knew the market was seriously oversold and committed a serious amount of capital to the market. Needless to say things went quite nicely but I always remebered 2 important things. Hubris equals failure and the market can remain illogical longer than you can remain solvent. Please feel free to email me at [email protected].