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Junior miners have never looked so cheap... again
I'm cross with myself. It's one thing having a system. It's another actually sticking to it.
Reading back through some of the articles I have written over the past year, there is a recurring theme: that junior gold and silver miners have been underperforming the metal. In July of this year in my article How to make money from markets you know nothing about I outlined a simple, technical indicator that identifies major trend changes and tells you, essentially, when to be in and out of a market.
In another article that same month - Oil down, junior miners up? Let's hope so - I identified a clear level of support that if broken meant get out of juniors.
Both indicators said sell. Yet so wedded had I become to the junior story that I didn't. Why on earth did I stick with these dogs? Let me explain…
Why I didn't sell my junior mining stocks when I should have
A sound engineer friend of mine who feels he doesn't get the work his experience and expertise warrant is forever saying, "My problem is, I know too much." He's right. What you know can distract you. I meet and get to know the management of every junior I invest in. I identify those who I think are trustworthy, experienced, dynamic and competent. As importantly, I identify those who I think have companies with superb assets in safe jurisdictions. What's more I spend hours every day reading about the economy, resources, money and everything related to my investments.
The more I read, the more convinced I become that we have a global shortage of resources; the more convinced I become that monetary systems are in need of a complete overhaul and that gold will have a part to play in this; and the more wedded I become to the unequalled potential of some junior mining companies – just when I should have been getting out of the market.
If I had done, I could now be swooping back in, cash rich, and buying left, right and centre, confident that I would double my money by the spring. Many companies I know are trading for less cash than they have in the bank. They're worth more defunct than operating. That has to be a low risk entry. Junior resource companies have never looked so cheap. But I'm sure I've said that before.
Markets are a great humbler. The lesson I learn once again though is - keep it simple and stick to your rules.
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Am I selling now? No. Famous last words, but it's too late in many cases. Juniors are just too cheap. What's more I see a bounce here between now and the spring. Come April I may sell, depending on the indicators.
Talking of rules, where are we now with gold and silver – the metals themselves? Here's the bad news.
Based on the simple technical strategy outlined in How to make money from markets you know nothing about, we are close to a sell signal. The 34-week moving average (red line) is crossing down through the 52-week moving average (blue line). That cross is our sell signal. But we are not there yet. If gold – as looks possible – does a double bottom at around $740 and rallies back up, there is still hope.
Silver is close to a sell signal
In the case of silver – that most impossible of metals to trade – the sell signal is imminent. However, yesterday silver rallied while gold sold. That is potentially bullish. If we have a double bottom with the 2006 lows at $9.50, that would be a great set-up.
Meanwhile, we are close to a buy signal on the US dollar, as the moving averages cross back up.
How on earth could something so flawed as the US dollar be on a buy signal? Because it is, for now, the senior currency, to which you see an inevitable flight during a post bubble credit contraction.
Sterling buyers should hang on to gold
However, we are British. We buy our gold with our good Queen's money. Unlike our transatlantic friends, we do not have a currency that anyone seems in any particular hurry to fly to. Against the pound, gold is off its highs, yes, but still on a buy signal in a very clear uptrend.
So no need to rush for the exits there just yet.
Silver, however, is close to a sell – I'll keep you posted on this one.
Our recommended article for today
Why you should hang on to your shares
Markets may be nervous but there are good reasons not to sell your stocks. And if you don't need your money right away, and intend to hold for the long term, there are plenty of excellent stocks at bargain prices.
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Dominic Frisby
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