Gold and silver stocks are getting taken to the woodshed today, with the Philadelphia Gold and Silver Index down nearly 5% as I pen this issue. Junior mining stocks are getting pummeled even harder. There are two catalysts behind the selloff …
First, giant Barrick Gold Corp. (ABX), the world’s largest gold miner plunged nearly 10% this morning after reporting much worse-than-expected earnings thanks to rising costs and falling output in its Argentine mining operations.
Now, I wouldn’t touch ABX with a ten-foot pole as the management team of this over-indebted oaf has a long history of repeatedly stumbling. But unfortunately when the world’s biggest gold miner sneezes, you can bet smaller mining shares – even the highest quality stocks – catch cold. It’s simply guilt by association.
Second, there’s the ongoing portfolio rebalancing saga with the VanEck Vectors Junior Gold Miners ETF (GDXJ), which I briefed you about last week. This is creating unusually high trading turbulence in a sector that’s already one of the market’s most volatile sectors.
In an environment of uncertainty like this, trading desks pull their bids, refusing to make markets in the less liquid mining stocks.
And worse, institutional investors back away from the entire sector, large cap as well as small, until the dust settles.
So here’s our game plan. Right now we’re intentionally light on mining stocks and our allocation to gold and silver ETFs, because we’ve been expecting a correction, as you can see in our E-Wave cycle forecast chart below …
You can see this pullback in gold, and mining shares, was correctly anticipated in the forecast chart, followed by a bounce into the first week of May, before the correction really gets underway later next month.
We intend to use this bounce to lighten up on our small holdings and/or tighten our protective stops. Plus, we’re close to pulling the trigger on one or more inverse ETFs to directly profit from the correction we see later in May.
But for right now, we’re waiting patiently for an overdue bounce, which our E-Wave model expects over the next week or two. That will give us more attractive prices to make our next moves.
The good news is this turbulence in precious metals markets will also create some outstanding longer term buying opportunities in the sector when the uptrend resumes in June, as you can see at far right in the chart above.
In the meantime, continue to hold all existing positions and related stops. Remember, we have mental stops we are monitoring for you on several holdings, so as not to tip-our-hand to market makers. And we’ll let you know ASAP when it’s time to make the next move.
Bottom line: We’re experiencing more volatility in mining shares, just as we expect, but that can cut both ways. These stocks could easily jump 5% or more on the next bounce, giving us a good opportunity to lighten up and get positioned for a steeper selloff in the sector. Stay tuned.
Good investing,
Mike and David
