Don’t Hate the Asset, Hate the Price!

The idea of owning gold miners last year had become laughable by the time the final bell had rung. The sector was down more than 50% versus the S&P 500’s total return of 30%. This disparity in performance was incredibly extreme, it’s highly irregular to see any one industry group within the stock market behave in a way so contrary to the prevailing trend.

But that was last year, and this year something new is already underway: Ladies and gentlemen, the gold miners are on fire.

Nothing much has changed between December of 2013 and January of 2014, but the way the game often works is that last year’s trash can become this year’s treasure for no important fundamental reason – a shift in sentiment is all it takes. And of course, once capitulation happens and tax-loss dumping is out of the way, sometimes there’s just nobody left to sell.

We’re witnessing the effects of that phenomenon now in the gold mining equities. I took a look at some of the largest components of the GDX gold mining stock ETF and this is what I saw:


On January 3rd I debated as the bull on Newmont Mining for CNBC’s Halftime Report and explained why it was an easy stock to buy. People were shocked, “Haven’t you been trashing gold stocks for years, Josh?” And yes, I had been – not just toward the bottom last year, but close to the top, actually. Here’s me in November 2011 imploring David Einhorn not to buy into these names to express a bullish thesis, GDX was 60 at the time and would make its way straight down to 20 over the next two years.


As you can see from the chart above, the mining ETF seems to have found a bottom exactly where it did in 2008, which is really interesting and logical in a way. Tops and bottoms on charts tell us about areas where there is a shift between how badly people want to sell and how desirous they become to buy.

Price has memory.

Technical analysis is the study of supply and demand and it centers around how people behave at specific prices, it is not witchcraft or voodoo and much of it is intuitive. I think gold miners arresting their slide at that old historic price level is highly intuitive, although whether it holds is anyone’s guess. So far, it seems to have served as a springboard.

The bounce in price for these forsaken equities is being accompanied by a praise chorus in the financial media. Here are three articles from the last week that make the case for these stocks to be bought aggressively – one month after they were an embarrassment to be seen with!

First, there’s this from Todd Shriber at ETF Trends:

A Generational Opportunity in Gold Miners

Following a brutal year for bullion in 2013 and an even worse year for gold miners, those bullish on the yellow metal and the companies that extract it from the earth may have something to hang their hats on. Buying last year’s losers…was extolled as a good by some in late 2013. The advice is paying off as the $6.9 billion GDX, the largest gold mining ETF by assets, is up 4.5% in just the past week. That could be just the beginning for an ETF that plunged 54% last year, a drop that was nearly twice as bad as the losses incurred by the major ETFs backed by holdings of physical gold.

On Thursday, Citigroup weighed in on the attractiveness of the mining stocks:

Citi goes bullish on miners for the first time in three years

 “Investor sentiment has hit rock bottom. The mining sector has moved through five stages of grief, namely Denial, Anger, Bargaining, Depression, and now we think we are in Acceptance that the sector has moved into a new norm,” said lead analyst Heath Jansen, in a note out Thursday…Jansen foresees a flat commodity-price environment ahead and a reduction in volatility. An improvement in U.S. and European growth will help boost commodities, while weakening commodity currencies — the currencies of major exporters like Australia, New Zealand and South Africa — are boosting miners, he said. On top of all this, miners are cutting costs, improving balance sheets and aligning with shareholders’ interests. Because of this, earnings momentum has become positive.

Finally, this morning I opened Barron’s to see Ben Levisohn quoting a Barclays analyst on how gold equities could work even if the metal itself stayed flat:

Goldcorp, Yamana Gold Offer Less Risk, Barclays Says

“Given gold equities broadly sold off in 2013 and are broadly under owned to start 2014, we believe that when capital begins to flow back into the sector (due to less volatility in the gold price), some investors will favour gold companies that offer protection from lower gold prices or leverage to flat gold prices. In our opinion, companies with production growth, shrinking operating costs, declining capital obligations and conservative balance sheets will be best suited to offer that protection or leverage.”

The lesson that this kind of thing has taught me over the years is that to hate an asset class or a sector is irrational – we should only hate the prices. Because almost everything can be either a good buy or a good sell at some point. As many were fond of saying in the midst of the credit crisis, “There is no such thing as Toxic Assets, only Toxic Prices.” I’ll disagree with that massive overgeneralization but the sentiment behind the statement is mostly true. Throw a garage sale and put your CDs from the early 1990’s out on the table for a penny each – you know, like INXS or C&C Music Factory. You’ll see, there’ll be a buyer.

The airlines taught us this lesson in 2013. There is no sector of the market that’s been quite as despised as the airline stocks over the last few decades. Here’s Warren Buffett, who typically delights in buying out of favor industries, extolling the unvirtues of the group in 2002:

“If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: ‘My name is Warren and I’m an aeroholic.’ And then they talk me down.”

By February 2013, airlines had become so hated by investors that the last remaining ETF for the sector, FAA, had been shuttered by its sponsor, Guggenheim Partners. Immediately afterward, the airline stocks would proceed to trade up 96% for 2013 and become the best performing industry group of the entire US stock market last year.

Still hate ’em?

Of course, the inverse of this concept is also true – there are no such thing things as permanently incredible investments and maintaining a love affair with an asset class, stock or sector isn’t going to serve us well either. James Montier (GMO) likes to call this his Golden Rule of Investing:

“No asset or strategy is so good that you should invest irrespective of the price paid.” 

I think the overarching message here is that, as investors, we cannot afford to get caught up in loving or hating specific sectors or geographic regions or asset classes. Instead, we should be focused on valuation, sentiment and trend in order to identify the better opportunities from the worse ones. How we go about that is going to vary greatly, but we can all do with a lot less emotion in our processes no matter what.



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