Technical analyst shares his outlook for Gold Mining equities...
IT IS hard to time the market. All investors know that. But Ron Struthers, editor of Struthers' Resource Stock Report and a 25-year investment veteran, has been able to weave his way in and out of the market with aplomb this year.
In this interview with The Gold Report, Ron Struthers reveals what he's seeing in his technical analysis that is signaling it's time to buy back in after selling off many Gold Mining equities in April.
The Gold Report: Ron, you said in your report that you're buying back most of the Gold Mining equities you sold in April. Why do you think it is it time to get back into the market?
Ron Struthers: Most of these stocks have been valued at $1,100/ounce (oz) of gold. They're not pricing the rise in the price of gold at all yet. There's a disconnect or disbelief in the market.
Precious metal stocks have corrected way too far, to valuations we have not seen since the 2008 credit crisis. Following that crisis our average yearly return on my precious metal picks was 155% in 2009 and 99% in 2010. I see this opportunity again.
TGR: Is that because the market is expecting the price for gold to come down?
Ron Struthers: That is the expectation, of course not among a lot of the goldbugs, myself included. Some see higher prices, but the general view of the mainstream investment community is the Gold Price is expected to come down. It is seen by them as rising too far, they do not understand what influences the gold market, and they mostly hear that it is another bubble.
TGR: Canaccord Research uses a sentiment indicator based on insider trading tracking by INK Research. The sentiment indicator uses a ratio of companies with buy-only transactions from insiders divided by companies with sell-only transactions from insiders over 30-day and 60-day periods. Some recent results from the sentiment indicator look quite positive.
Ron Struthers: Insiders typically know best because they're running the companies, so it's always positive when there is more insider buying. I like the sentiment indicator ratio. A lot of companies have insiders buying and selling, which produces a clouded picture. By using the ratio of buy-only to sell-only, it gives a clearer picture of what insiders are doing. I don't necessarily say they time the market that great, but it's another positive sign that the insiders think the stocks are too cheap.
TGR: Are there more insiders buying than selling across the board?
Ron Struthers: That's what that ratio is saying in regard to precious metal stocks: Insiders are buying more aggressively into the market; they see the best place to put their cash is in these companies.
TGR: You rely heavily on market charts to time your investment decisions. What charts do you rely on most?
Ron Struthers: I always look at the broad-based market by using the S&P 500. Then look at the PHLX Gold/Silver Sector index and the AMEX Gold Bugs Index. I also track the TSX Venture Exchange, which is a good benchmark for the junior resource market.
TGR: What key things are those charts telling you right now?
Ron Struthers: They've all come down a fair bit. The S&P had a nice run from a bounce off support around 1,100 points in early October, but it has pulled back. That market is in a sideways pattern, which is just fine for gold equities. Steep sell offs in the general equity market have often in the past been negative for gold equities, so I watch this and for signs that gold stocks are breaking free from the influence of the general market.
The AMEX Gold Bugs Index had a breakout to a new high over 600 points about two months ago. What I've noticed on the AMEX Gold Bugs Index is that the gold stocks have not been going down with the market every time. They've been holding or rising. They're bucking the trend, which is a really positive indicator. For example, at the end of October, the S&P sold off big two days in a row while the AMEX Gold Bugs Index bounced back the second day, completely recovered by the third day and went on to much higher levels from the selloff while the S&P has yet to recover to its previous October high.
The Venture Exchange had quite a correction from about 2,400 to 1,350 points. The juniors corrected much further than the senior and midtier golds. In September, the Venture Index was at its high from last year, about 1,750 points, a support level, and then there was a big sell-off in gold at the end of September as the Gold Price was knocked down about $300/oz with central bank Intervention. The index also took a quick, sharp drop on that sell-off in gold. That really hammered a bottom into that market, down to 1350. Since then, it's rallied up a fair bit, but I'm still looking for about another 200 points. I'd like to see it get over 1,800 to be sure that it's in a new bull move for the juniors. That would be a higher high, above the level where it fell from in September.
TGR: Is that what you're anticipating?
Ron Struthers: Yes, but I want to see proof or confirmation that it happens. I want to see a move in that index. That will seal the case that it's going much higher. But if it gets to that 1,800 level and isn't able to go through that, I might take a more conservative stance on the junior market, lighten up a bit, and go more to cash.
TGR: What did you notice in April that caused you to start liquidating your portfolio?
Ron Struthers: The biggest influence on my decision to time the selling then was the price of silver. It was having a very strong move. I figured silver wanted to get to that $50/oz mark, which was the old historic high, but would then see a good correction. It moved up so strongly and so fast, so a good correction would be normal. Gold and silver equities had both been strong up to that point, the TSX Venture Index had a 1,000-point rally, the Amex Gold Bugs Index 200 points, so my feeling was silver was going to have a peak in the intermediate term when it reached that $50/oz mark and its correction could be a catalyst for a good correction in both silver and gold stocks.
TGR: You noted over the summer that some strength was coming back into the Gold Price. Why didn't you jump back in then?
Ron Struthers: Actually, we were starting to buy back in during July and August, just not that aggressively. I was looking for a bottom around then, but in hindsight the bottom came later. We've started buying more aggressively these last couple of months. It's always difficult to time the market exactly.
TGR: There are a lot of concerns about sovereign debt problems in Greece and Italy. In a Nov. 2 research report you said, "Greece deserves to go bankrupt and will go bankrupt in time along with all of Europe followed by Great Britain and the US" That's a bit extreme. Some well-known economists believe that there may not be any bankruptcies necessarily, but there could be 20 years of static growth.
Ron Struthers: Europe is prolonging this in the hopes that the economies will pick up, tax revenues will grow again and things can continue as they always have. The real problem is simply too much debt and the debt problem can't be fixed by adding more debt. The only way to fix that problem is to settle the debt, liquidating to pay down and/or restructure defaulting on some or all of the debt as what happens in a bankruptcy.
In the case of Greece, it's not called a bankruptcy, but when debt holders accept pennies on the Dollar or, in the Greece case thus far, 50% on your bonds, it is basically a default or like a bankruptcy agreement. At 50%, this is still not enough and will not work; even with rosy projections the Greece debt will be back up to 120% of GDP in a few years. Assuming this agreement goes through, it will default again and more debt will be defaulted on; in the end it will probably work out that bond/debt holders receive closer to $0.20 on the Dollar. Call it what you like, I say bankruptcy.
This excessive debt problem, either way too much sovereign debt like Greece or too much private debt like we have seen in the US—and a combination of the two—is a problem around the world, including most of Europe, Ireland, Britain, Japan and the US All this debt will be defaulted on within the next several years.
The US has not resolved the debt problem that came to light in 2008. It has basically moved the bulk to the Fed balance sheet. The US has 50 states and many of them have a larger GDP than Greece and just as bad of a debt problem. Perhaps the US has 25 Greece-like problems yet to deal with, on top of the private sector debt problem and eventually a sovereign debt problem because it will keep piling on $1+ trillion Federal debt a year, as long as the bond market allows it. In other words, it is just like a ticking clock with a too short fuse.
TGR: Thanks for your time.
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