A Funny Thing Happened on the Way to the Gold Rally

Here is the original version of my story which ran in FreeMarketCafe.com's Daily Grind today.

I’m writing from the Pessimists and Downers Association of Canada – excuse me, the Prospectors and Developers Association of Canada (PDAC), the world’s biggest mining conference. Never before have I been in a group of people sitting on literal gold mines and yet so down in the mouth at the same time.

In a way, we can’t blame them. The action in gold mining stocks played out as absolute carnage for nearly three years. And it seemed every time the miners stuck their heads out of their holes to sniff the air, they’d get whacked on the heads with a stick. Being the mole in a game of Whack-a-Mole will make anybody bitter and jumpy.

Finally, gold and gold miners have started to rally. Gold is up 12% so far this year… and the Market Vectors Gold Miners ETF of gold stocks is up twice as much! But you wouldn’t know the good news from the mood at PDAC.

As I walk through the PDAC this year, held in Toronto, which is deep in winter’s icy grip, I find it fitting that the standard uniform for Canadian business is a black suit with a black overcoat. Many (not all) of these guys are acting like they’re in mourning for something… maybe for the better days of Canadian mining.

And it’s not just a mood, it’s statistical.   Jeffrey Christian of CPM Group pointed out that a third of the gold project development that was scheduled in the early part of 2013 has now been deferred.

Source: CPM Group/Jeffrey Christian

 And if you’re wondering about silver projects, we’re seeing the same thing in that space. Low prices for too long means one project after another has been shelved.

That’s pessimism.

Well I have news for the mourners in black overcoats: better days lie ahead. And I believe they’re coming sooner than you think.

I mean the thing about miners, engineers and geologists is that they hate to sit idle. So as the prices of gold and silver came down, mining companies cut costs to the bone. They redesigned their projects and turned over every rock to find a dollar. Sure, some companies went belly-up. But that just meant that other companies got to pick up great projects for a song.

So we have low-cost miners and developers that picked up projects on the cheap, run by guys who know how to squeeze a dollar until it screams. The best ones not only are going to make money, they’re going to make a LOT of money. All they need is for the price of gold to go up… some.

It looks like they’re starting to get their wish. Gold has rallied sharply since mid-December. And look at the effect that rally has had on junior miners, as tracked by the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ)…

You can see that junior miners finally broke out of their kamikaze dive. And they’re rallying on bigger-than-usual volume. That sure looks like a turn in sentiment to me.

Someone who definitely understands the positive reality underlying all the doom and gloom is Rick Rule, chairman of Sprott U.S. Holdings.

“Bear markets are like sales,” Mr. Rule told a packed room at PDAC. And since junior miners as a group were down 75% from their peaks, it was like “the market is 75% less risky.”

“You’ve been here through the pain,” Mr. Rule added. “Why not stick around for the gain?”

Now, I should say that both Rick Rule and Jeffrey Christian believe we’ll see lower gold prices before we see higher gold prices. Maybe they’re right.

On the other hand, I’m finding a nice collection of miners who make money at current gold prices… and will make a heck of a lot more money at higher gold prices. 

After all, you've got miners producing rocks like this ...

That’s me with an ore sample from a little-known miner.  See all that yellow in the rock? That’s gold.  This is a company mining big, thick visible gold.  And that’s just one target – they have other targets close by.  Don’t tell me they can’t make money – they ARE making money. And yet, because this company is in an industry that is hated (for the time being), this stock is trading for pennies. For the time being.

Maybe prices will go a bit lower. But I don’t think investors should worry too much about catching the exact bottom. There’s just too much potential upside to risk missing the move.

After all, the Chinese are buying gold hand over fist. The world’s central banks keep accumulating gold, even as they pooh-pooh it for the general public. India is likely to lift its restrictions on gold imports sooner rather than later, unleashing a flood of pent-up demand. And ETFs are buying gold again and it was ETF selling last year that hammered gold prices into the pit.

So to my gloomy friends in Canada, I’ll put it in terms you can understand. In the words of the great Canadian rock band Barenaked Ladies:

“Odds are we’re gonna be alright.

Sure things go wrong, but I’ll take my chances

Odds are long, so why not play?”

I’m coming back from Canada with new recommendations for my subscribers. If the market is 75% de-risked, as Rick Rule says, and I agree with him on that, then I’d say the odds are these stocks are going to do all right.

In fact, I’d say the bigger risk is doing nothing. Sitting on your hands could cost you a lot of money.

Sure, things go wrong. But I’ll take my chances.

Whatever you do, good luck and good trades,

Sean Brodrick