Gold Mining Stocks: This Industry Still Has Triple-Digit Upside

Gold MiningToo Late to Buy Gold Mining Stocks?

This is our 90-day (three month) update on my longshot pick gold mining stock, Direxion Daily Jr Gold Miners Bull 3X ETF (NYSEArca:JNUG) which I first presented in January.

How is the pick doing? Well, pretty good by general market yardsticks.

If you factor in that this is a highly leveraged gold pick that has had to do battle with the “paper gold exchanges” in New York and London; resist a major sector beat-down delivered late last week by assailants unknown; as well as fight the largest gold-short position ever recorded by the so-called “commercials” going into the top of this month…well, with all that taken together, I would suggest the performance to date becomes even more impressive.

In this update, I want to do a few things I have not done before.

First, I am going to present an annotated chart of not just JNUG, but also the Market Vectors Junior Gold Miners ETF (NYSEArca:GDXJ):

Direxion Daily Jr Gold Miners Bull 3X ETF

Market Vectors Junior Gold Miners ETFThe reason I presented the additional information above is as follows:

  1. As I explained in my January essay when the pick was first presented, this is not your typical stock, or even your typical exchange-traded fund (ETF). This is a one-of-a-kind derivative that pivots (leverages) off a base index known as the GDXJ, essentially a proprietary index of gold and silver juniors.
  1. JNUG is a relatively recent ETF, one that was launched in October of 2013, smack-dab in the middle of the dreaded 2011–2015 “gold bear.” Therefore, any attempt to make sense of JNUG on its own merits, however well intentioned, will simply create frustration because of missing data points. My solution to this was to bring up for you the second chart—the GDXJ (which has data points back to 2009)—and then try to extrapolate what the past history on JNUG might have been by looking at trends from the archived GDXJ information (read the annotations on the charts for more info.)

Note also how the chart of JNUG has become less parabolic and seems to be forming what could be the start of a prolonged 45-degree uptrend (called by some technicians a “power uptrend”). In our last monthly update, I noted the importance of seeing this transition if the bullish trend were to successfully continue. Very promising indeed.

Looking at the Big Picture

Something else I have not done before is that I want to address some areas of the broader gold market that are impacting JNUG:

* The underlying index for JNUG, the GDXJ, is in the “junior” sector only. The issue that arises is does this differ from the performance of the senior golds?

The financial circumstances in each sub-sector vary significantly so, arguably, performance during different market stages would vary too. During the gold bear, for example, the seniors were concerned with simply maintaining cash flow and avoiding shareholder mutiny. Whereas the juniors knew very early in the bear they were “marked for death,” and they have been fighting literally to survive. See also the next question.

* JNUG has day-by-day outperformed the senior golds since I first presented the pick. Why is this?

One aspect of our much-abused capitalist system that has not changed over the years, in spite of central bank interference at levels never seen before in recorded history, is that we like to reward risk. Junior miners are “higher risk for higher reward,” period, end of story. The “law of the jungle” rules here—some juniors will survive and some will not. Those that survive (i.e., those that choose to either mine bullion for profit or be taken over by a senior) need to be rewarded for their risk; or, purely and simply, nobody would be prospecting for a mine anymore.

Therefore, we have the paradox whereby, in most cases, the senior mines are more likely to, via takeover and buyout, ultimately benefit (in the long term) from the labors of these juniors more so than the juniors themselves. But, to make the system work, the successful juniors need to be rewarded in the very short term at a much higher level of payout.

(Also, as I explained when I first made the pick, the advantage of combining a whack of juniors under one single index is that, in theory, the gains made by the winners will more than compensate for the losses by the losers. My original article contained a detailed discussion of “risk mitigation” within JNUG.)

* Is it too late to get into this pick?

Well, honestly, that depends. If you look back on the reasoning I presented back in January, you will recall this was specifically framed as a “longshot” because (and detailed data was given at the time) I thought it could deliver a potential 75x return (i.e., a 7,500% gain) if gold should retrace to the old high. So by that yardstick, we have some considerable ways to go.

From a purely technical point of view, however, if you look closely at the charts presented above, and the annotations, you can see that, notwithstanding strong gains to date, the junior mining sector has merely returned to the “baseline” established between 2013 and 2015; and the gain so far has merely reversed the brutal and mindless damage the sector suffered over the last 12 months, approximately. This is also very promising, especially when you consider that the gold high itself was reached way back in 2011; and the high in JNUG was both subsequent and proximate to that date.

Equally promising are the citations and references presented in my more recent essays where I argue (persuasively, I hope) that some very key insiders believe that a “reset” of the world financial system is coming. And those same insiders suggest gold will play a larger role in that reset than it has for the last half-century or so. This suggests a potential final price for gold even higher than the infamous 2011 high. So, on a purely fundamental basis, that is promising as well.

Taken together, all this suggests potentially more upside to come.

* There are stories circulating in the media that, when you buy these sorts of stocks, you think you are getting something of value underlying the price, but in fact you are not.

Let’s look at an example:

SPDR Gold Trust (ETF) (NYSE:GLD), for example, the best-known and most popular “paper gold” play for the masses, has amended its prospectus a few times since its inception. The implication in the marketing is that it may be fully backed by “real” gold. However, if you wake up one morning in a funky mood and call the fund to redeem your shares (units) for the yellow metal, you will quickly discover that such is a right you do not actually have. (Contrast this to the various Sprott-branded trusts, for example, similar vehicles in many ways, where a right to redeem in physical metal is baked into the cake, so to speak.)

The issue with JNUG is that, outside of shares in the underlying mines comprising the GDXJ index (which it holds to a degree, but not to a degree that completely underlies the full and highly leveraged unit price), there was never anything physical here in the first place. This is a derivative on an index. You choose to enter the play because you think the mining sector is going up and you exit the play when you no longer feel that way. This is a pure paper play.

* There are many recent articles saying that gold is going to $10,000, which is way past the $1,900 high I mentioned in my original article…so how would this affect JNUG? How likely is this?

First, if gold goes to $10,000, then the 75x longshot number I suggested will be exceeded by a significant amount.

As to my personal thinking, I have expressed that in prior essays. What I said then, and what I say now, is that if not for China and Russia, the suppression of gold by the Western central banks could have proceeded for a very long time. China and its new “BFF” Russia are the game-changers. China has already been busy on the geopolitical chessboard, getting all the pieces into play that it needs to take control of the gold price away from the miscreants in New York and London.

However, in my opinion only, in the absence of a Bretton Woods style of “reset”—which would move gold much, much, higher, to extricate the entire world from a potential catastrophe that literally boggles the mind—China will merely seek a “fair” gold price, not a “high” price.

China is not interested in gold as a master (which would happen at a high gold price) but rather in gold as a servant. It would like to be rewarded for having the sense to stockpile the metal while the West was playing “silly bugger games” with its citizens, and it intends, I think, to back its new trade route (“one road, one belt”) with gold.

But all that can be easily accomplished with gold between $2,500 and $3,000 per ounce. That is where I think gold is headed, at least in the near future.

* JNUG, as I have explained in earlier essays, usually does not qualify for margin because of the volatility. The issue that arises is how does an investor cope with the volatility and still sleep at night?

That depends. If you look at the massive minute-by-minute volume in JNUG, you will see that, without fanfare or drawing attention to themselves, top-level traders and algos are playing this pick like an electric guitar at a KISS reunion. Clearly, from the data, they are moving in and out faster than the lead character in TV’s The Flash. If this is your trading style and you are comfortable with that, by all means have a go.

Going in and staying in for the long term, however, is a bit different. That requires a pretty solid conviction that, one way or another, gold will trend incrementally higher over time. (Especially during your own lifetime, because essays that suggest China will establish a gold standard no later than 2049—the 100-year anniversary of the revolution— are of interest only to very young investors who still need their parents’ permission to stay up late.)

Owning JNUG (without benefit of margin) essentially guarantees you a wild ride that not even Disneyworld can duplicate. Not for the weak of heart, both literally and figuratively.

* JNUG, some writers have noticed, is not a straightforward investment. It has aspects, both visible and invisible, which are, to say the least, “unusual.” What are these, and how will they impact the future of the pick?

In my almost 50 years of working with the markets—I used to give lectures on stock picking in university—I cannot remember ever seeing a situation where quasi-governmental, third-parties (with the ability to print money at will, and with exemption from judicial oversight) entered markets on a such a massive scale with the clear intent to bend them to their collective will. And in plain sight! There is no precedent for this. This is the kind of thing you would expect to see on the Syfy channel, not in your daily market report.

And, moreover, these self-designated “Masters of the Economic Universe” have a clear, albeit bifurcated, view on gold. For their own private accounts, they love it and simply cannot get enough. For the general public, however, it is a “barbaric relic” that “takes up valuable vault space,” and they will do whatever it takes to minimize its value and diminish its importance in the modern world.

As long as this group remains in total control, gold is not going anywhere and neither is JNUG. However, this control is now being challenged on multiple fronts and seems to be weakening. Something is definitely afoot in the geopolitical arena, and we are no longer seeing “business as usual.” A lot of this, of course, is incremental in nature but a pattern is forming nonetheless. Just over this past weekend, for example, we saw a specific and unambiguous threat by the Saudis to start dumping U.S. Treasuries on the open market if Congress proceeds to investigate the (alleged) Saudi role in 9/11.

Now, you could say this is much too subtle for the average person to notice, but my feeling is that a series of small “paper cuts” will do the job as effectively as one large slash. The Fed has become the sole major buyer of U.S. debt in the last decade—what one cynic unkindly compared to a dog eating its own vomit—so, astonishingly, the market really has no pricing mechanism in place right now to properly value these instruments. That is, outside of the Fed’s own whimsical notion that, because demand is so outrageously strong, rates should be outrageously low. (Unfortunately, what everyone seems to have missed is that demand is 100% artificial and self-serving, not organic; but, hey, what’s a few trillion dollars among friends?)

Arguably therefore, if one of the largest holders of U.S. debt on the planet should decide to release that debt all at once, the effect would be completely chaotic and de-stabilize economies around the world. Hence the threat. Nor is this type of news unique. I have covered similar omens and portents in my earlier essays. (Source: “Saudis Threaten To Liquidate US Holdings,” Zerohedge, April 16, 2016.)

The launch of the SGE Gold Fix this weekmentioned in several of my recent essaysis also part of this process.

Therefore, this is no longer an investment in the traditional sense but more like a wager on a sports team. Only, in this case, the sports team is trying to control the known financial universe, and is just coming off a multi-year winning streak. JNUG—and indeed all bull gold plays—will only reach their potential if and when this team finally meets their match on the playing field.

The one single thing that is crystal clear is that the two sides to this match (the pro-gold folks and the anti-gold folks) cannot co-exist or even find a middle ground. As in the movie Highlander, “there can be only one.”